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Flashcards in CPA FAR Deck (1374):
1

How are changes in accounting principle applied?

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

2

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

A change of principle.

Applied retrospectively.

3

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

A change in accounting principle.

Applied retrospectively.

4

How is a change in accounting estimate applied?

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

5

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

6

How is a correction of an accounting error made?

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.

7

What are the requirements for a prior period adjustment?

Effect is Material

Is identifiable in Prior Period

Couldn't be estimated in Prior Periods

8

How is a change from a non-GAAP accounting method to a GAAP method recorded?

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

9

How does an inventory error effect the financial statements?

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.

10

How is a change in entity recorded?

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

11

What is a serial bond?

Any bond that matures in installments

12

What is a term bond?

Any bond that matures on a single date

13

What is a debenture bond?

A bond not secured by any collateral

14

What is a sinking fund bond?

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed

15

What is the formula to calculate proceeds of a bond sale?

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

16

How is the present value of a bond calculated?

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)

17

Which costs are included in bond issuance costs? How are they recorded?

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

18

How are bonds reported when classified as trading securities?

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

19

How are bonds amortized under the interest method?

Both discount and premium amortization amounts increase each year

20

Describe the book value method when converting from bonds to stocks.

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

21

What is the stated rate for a bond?

Rate on the face of the bond

22

What is the market rate on a bond?

Rate that bonds are currently selling for

23

What happens when the bond's market rate is greater than the stated rate?

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

24

What happens when a bond's market rate is less than the stated rate?

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

25

How does accrued interest on a bond affect the purchase price?

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.

26

When does interest expense start accruing on a bond?

When the bonds are issued

27

How is an interest payment on a bond calculated?

Cash for payment : Stated rate x Face amount

28

What amount of interest is expensed on a bond interest payment?

Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount

29

What are convertible bonds? Which recording method is used?

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

30

How is the retirement of bonds recorded?

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

31

When is a gain recognized in a debt restructuring?

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

32

What is the gain recognized under a settlement of debt?

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

33

For a creditor; how is a loan impairment recorded?

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

34

When is the fair value method used for recording interest in a separate company?

20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period

35

When is the equity method used when purchasing another company's stock? How is it recorded?

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

36

When are companies required to file consolidated financials? How is it recorded?

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

37

When is consolidation not required?

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

38

What occurs under a step acquisition?

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

39

What is the difference between an acquisition and a merger?

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

40

How are acquisition costs recorded in a merger?

Expensed in period incurred - i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional

Netted against stock proceeds:
Stock registration and issuance costs

41

What is a current asset?

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

42

What is a current liability?

A liability expected to be paid within 12 months or less

43

How is the Quick Ratio calculated?

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

44

How is the Current Ratio calculated?

Currents Assets / Current Liabilities

45

How is Working Capital calculated?

Currents Assets - Current Liabilities

46

How is A/R Turnover calculated?

Credit Sales / Average A/R

47

How is Inventory Turnover calculated?

COGS / Average Inventory

48

How is Day Sales in Inventory calculated?

365 / Inventory Turnover

49

How is Days to Collect A/R calculated?

Average A/R / Average Sales per Day

50

How are gain contingencies recorded?

They are NOT accrued due to Conservatism

51

When are loss contingencies recorded?

If Probable - they are accrued (if estimable) and disclosed

If Reasonably Possible - they are disclosed

If Remote - don't accrue or disclose

52

What is a temporary difference related to deferred taxes?

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

53

What is a deferred tax asset?

Deduction will reduce future income taxes expense.

54

What is a deferred tax liability?

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

55

Which period's tax rate is used to calculate a deferred tax asset or liability?

The FUTURE enacted tax rate not the current one.

It is never discounted to present value.

56

What valuation allowance is used with respect to a deferred tax asset?

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

57

What effect do permanent differences have on deferred income taxes?

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

58

What is deferred income tax expense?

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

59

How are deferred tax assets classified as current or non-current on the balance sheet?

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

60

How are derivatives recorded?

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

61

How are unrealized gains/losses on trading securities recorded?

Recorded on income statement

62

How are gains and losses on Available for Sale (AFS) securities recorded?

They are included in Other Comprehensive Income.

63

What is a Fair Value Hedge? How is it recorded?

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

64

What is a Cash Flow Hedge? How is it recorded?

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.

65

Where are gains and losses on foreign currency hedges recorded?

In Other Comprehensive Income (OCI)

66

What disclosures are required for derivative transactions?

Objectives and Strategies

Context to help investor understand the instrument

Risk Management Policies

Complete List of Hedged Instruments

67

How do transactions denominated in in a currency other than a company's functional currency affect the income statement?

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

68

What causes a Foreign Currency Transaction G/L?

A change in exchange rates between the functional currency and the transaction currency

69

Where are Foreign Currency Transaction G/L recorded?

Income Statement

70

Where are Foreign Currency Translation G/L recorded?

OCI

71

If the Functional Currency equals the Local Currency - what rate is used for translating Assets and Liabilities?

Current Rate as of the Balance Sheet Date

72

If the Functional Currency equals the Local Currency - what rate is used for translating Revenues and Expenses?

Weighted Average Exchange Rate for the year

73

If the Functional Currency equals the Reporting Currency - what Exchangee Rate is used??

Use Weighted Average - Historical Exchange Rates (Inventory and Pre-paid Assets and Property Plant and Equipment) and Current Exchange Rates (Monetary Assets and Liabilities and Inventory @ Market and Trading Securities and Deferred Taxes)

74

What is the primary objective of accounting?

To measure income

75

What is the most authoritative set of accounting pronouncements?

The FASB Codification

All pronouncements fall under the Codification umbrella

76

What are the 2 Levels of Authority within the FASB codification?

Authoritative and Non-Authoritative

77

How does managerial accounting differ from financial accounting?

Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP

78

Which financial reports are required to be filed with the SEC?

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

79

What is the focus of financial reports for individual companies?

Focus is on the needs of users to help them make decisions and assessments about the company

Does not make assessments of the economy

80

What are the Primary Constraints of Financial Reporting?

Cost vs. Benefit

Materiality

81

What are the Secondary Constraints of Financial Reporting?

Consistency - Year vs. Year

Comparability - Company vs. Company

82

What are the Qualitative Characteristics of Financial Reporting?

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


83

What are the Enhancing Qualitative Characteristics of Financial Reporting?

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

84

How does Conservatism affect the recording of accounting transactions?

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

85

What is an accrual?

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

86

What is a deferral?

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

87

What is recognition in accounting?

When an item is recorded and included in the financial statements

88

Describe fair value with respect to an asset

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

89

What market assumptions are made in a fair value assessment?

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

90

What items are included in a Level 1 input in the fair value hierarchy?

Price quotes or market prices

For example NYSE or NASDAQ

91

What items are included in a Level 2 valuation input?

Interest rates

Prime rate

92

What items are included in Level 3 inputs of the fair value hierarchy?

Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation

93

What are acceptable valuation techniques for fair value?

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

94

What are current assets?

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

95

What are current liabilities?

Liabilities that will use current assets during the present operating cycle

96

What is an accrued liability?

Expense that has been incurred but not paid

Example: rents payable

97

What is a deferred revenue?

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

98

When are revenues recognized?

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

99

What is a gain?

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

100

What is a loss?

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

101

What is an operating cycle?

Average time it takes to turn materials or services into Cash

102

What is the present value of future cash flows?

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

103

What is historical cost?

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

104

What is replacement cost?

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

105

What is a market cost?

The sale price of an asset (Exit Cost)

106

What is Net Realizable Value?

Sale Price of an Asset - Selling/Disposal Fee

107

When is royalty income recognized? How is it recognized?

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

108

When is revenue recognized in an installment sale?

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

109

What is deferred gross profit?

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

110

What is the cost recovery method?

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

111

What is subscription revenue? How is it recorded?

Payment has been received but performance is not complete.

As company performs revenue is recognized.

Recorded as a Deferred Revenue (Liability) on Balance Sheet

112

How are franchise revenues recorded?

Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized

113

How do you calculate sales revenue starting from cash basis income?

Mnemonic: SPEAR-BAR

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

114

How do you calculate COGS starting from Cash Basis?

Mnemonic: CRAP-I

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

115

How are discontinued operations reported? When are they used?

Reported Net of Tax after Continuing Operations but before Extraordinary Items

Company decides to cease operating a segment of its business (represents a strategic shift and has major effect on operations and financials)

Includes Income (or loss) from the period plus the gain (or loss) from disposal

116

For discontinued operations, what are the three requirements for disposal assets?

They must be Held for Sale - Sold - or Disposed of another way

117

What qualifies as an extraordinary item? How is it recorded?

Both unusual AND infrequent

Reported Net of Tax after Discontinued Operations

Note: Usual *or* Infrequent Items are reported as part of Continuing Operations

118

What is constant dollar accounting?

Adjusts assets to reflect a consistent level of purchasing power due to inflation

Uses the Consumer Price Index (CPI)

119

When are expenses recognized?

When they are incurred. Accrue if not yet paid.

120

What are accrued expenses?

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

121

When should impaired assets be written down to fair value and expensed?

Immediately.

122

What major items should be classified under General & Administrative (G&A) expenses?

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

123

What are business start-up costs?

One-time costs for opening a new business

Expensed as they are incurred

124

When is interest *not* expensed?

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

125

What are the major components of Comprehensive Income?

Net Income + Other Comprehensive Income (OCI):

Revenues/Expenses

Gains/Losses

Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity

126

What items are considered cumulative accounting adjustments?

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

127

What is the purpose of a reclassification adjustment?

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

128

Where is Comprehensive Income reported?

Reported in a Single or Combined Income Statement

129

What disclosures on accounting policies are required in financial statements?

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

130

What are some major risks and uncertainties that must be disclosed?

Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability

131

Under Cash Basis Accounting how are Revenue and Expenses recognized?

Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow

132

Is Cash Basis Accounting ok for Tax Returns?

Yes

133

Is Cash Basis Accounting GAAP?

No - GAAP uses Accrual Accounting

134

What is an advantage of Modified Cash Basis Accounting?

It avoids the complexities of GAAP but provides more information that Cash Basis Accounting

135

Is Modified Cash Basis GAAP?

No - GAAP uses Accrual Accounting

136

What are the 3 acceptable options for Income Tax Basis Accounting

Cash Basis - Accrual Basis - Hybrid Method

137

What are the advantages of the Small and Medium Sized Entity Framework?

It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)

138

What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?

Deferred Taxes Method and Taxes Payable Method

139

What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?

Expensed or Amortized (15 years)

140

How is Goodwill treated under the Small and Medium Sized Entity Framework?

Amortized (15 years)

141

What are the required liquidation basis financial statements?

Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation

142

What is a Development Stage Entity?

A company that is still in the formation stage and hasn't yet begun principal operations or produced significant revenue

143

What is the key benefit of the accounting rules for Development Stage Entities?

Cost savings without sacrificing financial statement usefulness

144

How are Research and Development costs recorded?

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

145

Which expenditures are included in the cost of a building?

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

146

Which expenditures are included in the cost of land?

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

147

In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?

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.

148

In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

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.

149

How is donated property recorded by the donee?

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

150

How is donation of property recorded by the donor?

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.

151

How is double-declining balance (DDB) depreciation calculated?

(1 / Useful Life) x 2 x Book Value

Ignore salvage value.

152

How is Sum of Year's Digits (SYD) depreciation calculated?

(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

153

How is straight line depreciation calculated?

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

154

When is an asset considered to be impaired? How is impairment loss calculated?

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

155

How are legal fees to defend a patent amortized?

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

If unsuccessful they are expensed immediately.

156

What are the two steps for testing goodwill impairment?

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.

157

How are costs for developing software recorded?

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.

158

What expenditures are included in the cost of equipment?

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.

159

What are the three major types of funds in governmental accounting?

Governmental, Proprietary, Fiduciary

160

Which two accounting bases are used in governmental accounting?

Accrual basis - current economic resources focus (revenues recognized when earned)

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

161

What is a budget appropriation?

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

162

What is an encumbrance?

Records purchase and reserves it for the encumbrance.

163

What is the opening budgetary entry?

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

164

What is the closing budgetary entry?

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

165

What are the types of governmental funds?

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

166

What is a General Fund?

The operating fund of the governmental unit

Records Significant Revenues: Taxes; Tickets; Fines; Licenses

Records Significant Expenditures: Police; Education; Fire Dept

167

What is a Special Revenue Fund?

Restricted for a specific purpose such as street repair.

168

What is a Permanent Fund?

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

Principal remains intact.

169

What is a Capital Projects Fund?

Used to acquire and build facilities.

170

What is a Debt Service Fund?

Handles repayment of long-term debt and related interest.

171

Which fund statements are issued in Governmental Accounting?

Balance Sheet

Statement of Revenues; Expenditures; and Changes in Fund Balance

172

When is Revenue recorded in Governmental Accounting?

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

173

What is Derived Tax Revenue?

Money collected from people doing things:

Sales tax (buying cars) or income tax (people working)

174

What is Imposed Tax Revenue?

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.

175

What are the types of Proprietary Funds?

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)

176

What are the Fund Balance Types?

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

177

What are the types of Fiduciary Funds?

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

178

How are Assets & Liabilities presented on the Statement of Net Position?

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

179

How are Capital Assets shown on a governmental Statement of Net Assets?

They are shown net of debt

Asset Cost - Accumulated Depreciation - Asset Liabilities : Net Assets

180

How is infrastructure reported on a governmental Statement of Net Assets?

Modified approach:

Reported at cost; no accumulated depreciation

181

How is a Statement of Net Assets divided?

Into Governmental Activities and Business Activities

182

How are activities presented in a Statement of Activities?

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.

183

What is the primary objective of governmental accounting?

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

184

What Financial Statements are required for Defined Benefit Pension plans?

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

185

What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?

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

186

What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?

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

187

What should be included in the Financial Statement notes for Defined Benefit Pension Plans?

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

188

Which organization's standards are the most authoritative in the hierarchy of international accounting?

The International Accounting Standards Board (IASB)

189

Where is the first place management should look for guidance on international recognition and accounting policies?

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

190

Which framework helps to develop standards for international accounting?

The IASB Framework

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

191

What is the objective of the IFRS framework?

To provide users with information on international accounting.

192

Which assumptions are followed within the IRFS framework?

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

193

What are the Qualitative Characteristics of accounting information within IFRS?

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

194

What are the Enhancing Characteristics of IFRS?

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

195

How does comparability differ under GAAP versus IFRS?

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.

196

What is the Pervasive Constraint within IFRS?

Cost vs. Benefit

197

Which items are considered reporting elements under IFRS?

Asset
Liability
Equity
Income
Expense

198

What are the criteria for recognition on IFRS financial statements?

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.

199

When transitioning to IFRS what type of financial statement must be produced for the first reporting period?

A full comparative statement using IFRS.

200

If IFRS was implemented in June 2012 for use in the December 31 2012 financial statements what is the Date of Transition?

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

201

For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?

The Fair Value election

202

Where on the financial statements are adjustments for adopting to IFRS made?

In the entity's retained earnings or equity

203

How is going concern different under IFRS than from GAAP?

Going Concern is an assumption under IFRS

204

How are extraordinary items treated under IFRS?

IFRS doesn't allow extraordinary items.

205

How is the completed contract method used under IFRS?

Completed contract method is not allowed under IFRS.

206

How is LIFO treated under IFRS?

IFRS does not allow LIFO.

207

Which financial statements are required under IFRS?

Statement of Comprehensive Income

Statement of Changes in Equity

208

How is the term income used in IFRS?

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

209

How is the term profit used in IFRS?

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

210

How does IFRS treat gains?

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

211

How does IFRS treat losses?

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

212

How does refinancing of current liabilities to long-term liabilities under IFRS differ from GAAP?

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.

213

How do contingent liabilities differ between GAAP and IFRS?

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.

214

How are bonds recorded under IFRS?

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

215

How are deferred taxes treated under IFRS?

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.

216

When can deferred tax assets and liabilities be netted under IFRS?

ONLY if they are related to the same country/taxing authority


For example China Deferred Tax Assets can't offset Japan Deferred Tax Liabilities

217

Which tax rates are used for calculating deferred tax assets/liabilities under IFRS?

The enacted rate or substantially enacted tax rate.

(GAAP is the enacted tax rate only)

218

Which items are recorded on the Income Statement in IFRS?

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

219

How are property plant and equipment (PP&E) recorded and valued under IFRS?

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

220

What are the requirements for using the revaluation model for PP&E under IFRS?

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

221

How is investment property reported under IFRS?

Initially recorded at cost

Revalued using either Fair Value model or Cost model

222

How is profit or loss recorded in the current period for investment property under the Fair Value model of IFRS?

Recorded on the Income Statement

Investment P/L : IS

PP&E P/L : OCI

223

Under IFRS how is investment property reported under the Cost Model?

Carried at Cost minus Accumulated Depreciation

Fair Value must still be disclosed in the notes to the financial statements

224

How are leases reported under IFRS?

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

225

How are intangible assets valued under IFRS?

Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss)

or

the Revaluation Model (Fair Value less Accumulated Depreciation)

226

How is internally generated goodwill reported under IFRS?

It is not recognized.

227

How is amortization of intangibles handled under IFRS?

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.

228

When must a lease be recorded as a Finance Lease under IFRS?

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

229

How are defined benefit plans recorded under IFRS?

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

230

How are interest expense and/or finance costs classified on an IFRS statement of cash flows?

They can be classified as either Operating or Financing

Once a classification is chosen all future costs must be classified there

231

How are significant non-cash transactions recorded on an IFRS statement of cash flows?

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

232

Which costs are inventoriable?

Purchases - Net of Discounts, Freight, Warehouse expenditures

233

When does ownership of goods transfer when shipped FOB Shipping Point?

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

234

When does ownership transfer when goods are sent FOB Destination?

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

235

Which costs are non-inventoriable?

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

236

When are discounts recorded under the gross method?

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

237

Under the net method, when are discounts recorded?

Under the net method, discounts are recorded whether used or not.

Unused discounts are allocated to financing expense.

238

How is gross margin calculated?

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

239

Describe the periodic inventory system.

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

240

Describe the perpetual inventory system.

Inventory count continually updated

Uses a moving-average cost flow method

241

In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

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

242

How is inventory turnover calculated?

COGS / Average Inventory

243

How is Average Day's Sales in inventory calculated?

365 / Inventory Turnover

244

Under a consignment system, who holds the consigned goods in inventory?

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

245

Under a consignment system, does the consignee hold consignment inventory in their own inventory?

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

246

What effect does overstatement or understatement of inventory have on ending retained earnings?

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

Misstatement of ENDING inventory does have an effect on retained earnings.

247

How does misstatement of ending inventory effect Ending Retained Earnings?

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

248

Which costs are included in COGS first under the FIFO (first in first out) system?

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

249

Which costs are included in COGS under the LIFO (last in first out) system?

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

250

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

COGAS / Total Units : Weighted Average Cost Per Unit

251

How does FIFO's COGS relate to LIFO's in a time of changing prices?

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

252

How do FIFO and LIFO change in a period of rising prices?

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

253

How do FIFO and LIFO change in a period of falling prices?

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

254

Under a Lower of Cost or Market, how are the benchmarks calculated?

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit

255

How are Available-For-Sale securities recorded on the Balance Sheet?

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

256

How are Available-For-Sale security Unrealized G/L treated?

Included in OCI (Other Comprehensive Income)

257

How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?

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

258

How are Held-to-Maturity securities recorded on the Balance Sheet?

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

259

How are Held-to-Maturity securities Unrealized G/L treated?

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


260

How are Trading Securities recorded on the Balance Sheet?

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.

261

How are Trading Securities Unrealized G/L treated?

Recorded on the Income Statement

If they are reclassified as HTM or AFS - there is no effect upon transfer.

262

How is a Capital Lease recorded?

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

263

What footnote disclosures are required for a Capital Lease?

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

264

What are the requirements for a Capital Lease for a lessor?

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

265

What are the characteristics of an Operating Lease for a lessee?

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.

266

What are the characteristics of an Operating Lease for a LESSOR?

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

267

What are the characteristics of a Direct Financing Lease?

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

268

How is a sale-leaseback recorded?

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

269

What are the characteristics of lease payments under an annuity due situation?

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

270

What are the characteristics of lease payments under an ordinary annuity situation?

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

271

What are the characteristics of a Capital Lease for a lessee?

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

272

Which financial statements are required for not - for - profit organizations?

Statement of Financial Position

Statement of Activities

Statement of Cash Flows

Statement of Functional Expense (Volunteer Health Organizations Only)

273

What are the major classifications found on a Statement of Financial Position?

Similar to Balance Sheet:

Assets
Liabilities
Net Assets
Unrestricted Assets
Permanently Restricted Assets
Temporarily Restricted Assets

274

What are the major classifications in a Statement of Activities?

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

275

What are the characteristics of a Statement of Cash Flows for not - for - profits? What are the major classifications?

Both direct and indirect methods are OK

Operating Activities - Unrestricted Revenues and Unrestricted Expenses

Investing Activities

Financing Activities - Endowments and restricted contributions


276

Which organizations are required to present a Statement of Functional Expenses?

Volunteer Health Organizations

277

Which statements are required for non - governmental hospitals?

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

278

Which basis of accounting is used for revenues and net assets?

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

279

What are the characteristics of unrestricted assets or revenue?

No restrictions or conditions placed on entity in order to use the resources

Note: assets earmarked internally by management are still unrestricted

280

When are revenues on contributions recognized?

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

281

When are services rendered considered contributions?

If the organization would have otherwise paid for them

or

They increase the value of a non - monetary asset

282

Is hospital charity care revenue?

NO.

It is disclosed in the notes to the financial statements only.

283

How are unconditional pledges to contribute recorded?

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

284

Which revenues are expenses deducted from?

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

285

What are the characteristics of temporarily restricted assets/revenue?

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

286

What are the characteristics of an endowment?

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

287

When is the donation of an art collection recognized as a contribution or asset?

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

288

When both Temporarily Restricted Assets and Unrestricted Assets are available for use - which assets are used first?

Temporarily restricted assets are used before Unrestricted assets.

289

How is a refundable advance recorded by a not for profit?

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

290

How are investments recorded and valued in not - for - profit accounting?

Fair Value is mostly used

Exception - Equity method used when significant influence exists

291

How are scholarships recorded?

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

292

How is depreciation expense recorded by a not - for - profit?

Depreciation expense is allocated proportionately to various functions

293

How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

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

294

If no goodwill is recorded upon admission of a new partner - which method is used for recording the new partner's interest?

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

295

If goodwill is recorded upon admission of a new partner - how is the partner's interest recorded?

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%)

296

At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?

Fair Value for assets contributed.

Present value of remaining cash flows for liabilities assumed.

297

Which Personal Financial Statements are required?

Required: Statement of Financial Condition (Statement of Changes in Net Worth is optional)

298

How are assets and liabilities valued in a Personal Financial Statement?

Estimated current value

299

How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a Personal Financial Statement?

Presented on Statement of Financial Condition between Liabilities and Net Worth

300

What is the general presentation on a statement of financial condition?

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

301

How is life insurance presented on a Personal Financial Statement?

Only shown if there is cash surrender value

It is shown net of loans against the policy

302

How are business interests shown on a Personal Financial Statement?

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

303

What is the discreet view in an Interim Financial Statement?

Interim period is a separate accounting period - not GAAP

Same accounting principles used for annual reporting should be used.

304

What is the integral view in an Interim Financial Statement?

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

305

How are discontinued operations & extraordinary items reported in Interim Financial Statements?

Aren't prorated

Fully recognized in Interim Period as incurred

If it occurs in Q3 - it's recognized in Q3

306

How are cumulative gains and losses reported in Interim Financials?

Reported as if they occurred in the first quarter

307

How is inventory valuation handled in Interim Financials?

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

308

What is one of the primary problems with interim reporting?

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

309

For whom is Segment Reporting required?

Publicly traded companies

310

What factors cause a segment to be significant and therefore to be reported separately?

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

311

What is the disclosure requirement regarding sales of 10% or more for one customer?

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

312

What items are included in operating activities on the Statement of Cash Flows?

Cash received from Customers- Interest & Dividends- Trading Securities

Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities

313

What items are included in investing activities on a Statement of Cash Flows?

Cash received: Sale of PP&E- Sale of Investments- Loan Principle

Cash paid: Loans- Acquisitions- AFS or HTM Securities- Taxes- Trading Securities

314

What items are included in Financing Activities in a Statement of Cash Flows?

Cash received: Issuance of Stock- Issuance of Debt

Cash paid: Dividends

315

What is the direct method for a Statement of Cash Flows?

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

316

What is the Indirect Method for a Statement of Cash Flows?

Starts with Net Income

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

317

When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

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

318

When is APIC recorded on a stock subscription?

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

319

To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

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

320

When are dividends in arrear recorded for cumulative preferred stock?

They are not accrued until declared.

321

When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

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.

322

What is the gain or loss when a non-monetary asset is distributed to a shareholder?

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

323

What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

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

324

When is Retained Earnings debited for FMV of Stock for a stock dividend?

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

325

When is Retained Earnings debited for Par Value for a stock dividend?

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

326

What is the effect of a stock dividend or a stock split on total shareholder equity?

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

327

What is the affect on APIC from a stock split?

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

328

When is compensation expense recorded at the time of grant for a stock option?

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

329

What interest rate is used to discount stock options?

The risk-free interest rate

330

What date is used as the measurement date for share-based payments classified as liabilities?

The settlement date.

331

How are compensation costs for share-based payments classified as liabilities measured?

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

332

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

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

333

What is the primary purpose of a quasi-reorganization?

To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors

334

How is return on Common Stockholder's Equity calculated?

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

335

How is book value per share of common stock calculated?

Total Shareholder Equity
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value

Book Value per Share : Total Book Value / Shares outstanding

336

How is the dividend per share payout ratio calculated?

Dividends per share / earnings per share

337

How is basic Earnings Per Share (EPS) calculated?

(Net Income - Preferred Dividends) / Average C/S Outstanding

Note - If cumulative- subtract the P/S dividend regardless of whether or not they're declared.

338

For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

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

339

For which areas is EPS required to be shown?

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

340

When do stock options increase share outstanding?

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

341

How is EPS calculated when convertible bonds are taken into consideration?

[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

342

How are changes in accounting principle applied?

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

343

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

A change of principle.

Applied retrospectively.

344

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

A change in accounting principle.

Applied retrospectively.

345

How is a change in accounting estimate applied?

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

346

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

347

How is a correction of an accounting error made?

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.

348

What are the requirements for a prior period adjustment?

Effect is Material

Is identifiable in Prior Period

Couldn't be estimated in Prior Periods

349

How is a change from a non-GAAP accounting method to a GAAP method recorded?

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

350

How does an inventory error effect the financial statements?

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.

351

How is a change in entity recorded?

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

352

What is a serial bond?

Any bond that matures in installments

353

What is a term bond?

Any bond that matures on a single date

354

What is a debenture bond?

A bond not secured by any collateral

355

What is a sinking fund bond?

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed

356

What is the formula to calculate proceeds of a bond sale?

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

357

How is the present value of a bond calculated?

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)

358

Which costs are included in bond issuance costs? How are they recorded?

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

359

How are bonds reported when classified as trading securities?

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

360

How are bonds amortized under the interest method?

Both discount and premium amortization amounts increase each year

361

Describe the book value method when converting from bonds to stocks.

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

362

What is the stated rate for a bond?

Rate on the face of the bond

363

What is the market rate on a bond?

Rate that bonds are currently selling for

364

What happens when the bond's market rate is greater than the stated rate?

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

365

What happens when a bond's market rate is less than the stated rate?

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

366

How does accrued interest on a bond affect the purchase price?

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.

367

When does interest expense start accruing on a bond?

When the bonds are issued

368

How is an interest payment on a bond calculated?

Cash for payment : Stated rate x Face amount

369

What amount of interest is expensed on a bond interest payment?

Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount

370

What are convertible bonds? Which recording method is used?

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

371

How is the retirement of bonds recorded?

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

372

When is a gain recognized in a debt restructuring?

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

373

What is the gain recognized under a settlement of debt?

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

374

For a creditor; how is a loan impairment recorded?

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

375

When is the fair value method used for recording interest in a separate company?

20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period

376

When is the equity method used when purchasing another company's stock? How is it recorded?

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

377

When are companies required to file consolidated financials? How is it recorded?

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

378

When is consolidation not required?

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

379

What occurs under a step acquisition?

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

380

What is the difference between an acquisition and a merger?

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

381

How are acquisition costs recorded in a merger?

Expensed in period incurred - i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional

Netted against stock proceeds:
Stock registration and issuance costs

382

What is a current asset?

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

383

What is a current liability?

A liability expected to be paid within 12 months or less

384

How is the Quick Ratio calculated?

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

385

How is the Current Ratio calculated?

Currents Assets / Current Liabilities

386

How is Working Capital calculated?

Currents Assets - Current Liabilities

387

How is A/R Turnover calculated?

Credit Sales / Average A/R

388

How is Inventory Turnover calculated?

COGS / Average Inventory

389

How is Day Sales in Inventory calculated?

365 / Inventory Turnover

390

How is Days to Collect A/R calculated?

Average A/R / Average Sales per Day

391

How are gain contingencies recorded?

They are NOT accrued due to Conservatism

392

When are loss contingencies recorded?

If Probable - they are accrued (if estimable) and disclosed

If Reasonably Possible - they are disclosed

If Remote - don't accrue or disclose

393

What is a temporary difference related to deferred taxes?

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

394

What is a deferred tax asset?

Deduction will reduce future income taxes expense.

395

What is a deferred tax liability?

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

396

Which period's tax rate is used to calculate a deferred tax asset or liability?

The FUTURE enacted tax rate not the current one.

It is never discounted to present value.

397

What valuation allowance is used with respect to a deferred tax asset?

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

398

What effect do permanent differences have on deferred income taxes?

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

399

What is deferred income tax expense?

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

400

How are deferred tax assets classified as current or non-current on the balance sheet?

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

401

How are derivatives recorded?

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

402

How are unrealized gains/losses on trading securities recorded?

Recorded on income statement

403

How are gains and losses on Available for Sale (AFS) securities recorded?

They are included in Other Comprehensive Income.

404

What is a Fair Value Hedge? How is it recorded?

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

405

What is a Cash Flow Hedge? How is it recorded?

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.

406

Where are gains and losses on foreign currency hedges recorded?

In Other Comprehensive Income (OCI)

407

What disclosures are required for derivative transactions?

Objectives and Strategies

Context to help investor understand the instrument

Risk Management Policies

Complete List of Hedged Instruments

408

How do transactions denominated in in a currency other than a company's functional currency affect the income statement?

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

409

What causes a Foreign Currency Transaction G/L?

A change in exchange rates between the functional currency and the transaction currency

410

Where are Foreign Currency Transaction G/L recorded?

Income Statement

411

Where are Foreign Currency Translation G/L recorded?

OCI

412

If the Functional Currency equals the Local Currency - what rate is used for translating Assets and Liabilities?

Current Rate as of the Balance Sheet Date

413

If the Functional Currency equals the Local Currency - what rate is used for translating Revenues and Expenses?

Weighted Average Exchange Rate for the year

414

If the Functional Currency equals the Reporting Currency - what Exchangee Rate is used??

Use Weighted Average - Historical Exchange Rates (Inventory and Pre-paid Assets and Property Plant and Equipment) and Current Exchange Rates (Monetary Assets and Liabilities and Inventory @ Market and Trading Securities and Deferred Taxes)

415

What is the primary objective of accounting?

To measure income

416

What is the most authoritative set of accounting pronouncements?

The FASB Codification

All pronouncements fall under the Codification umbrella

417

What are the 2 Levels of Authority within the FASB codification?

Authoritative and Non-Authoritative

418

How does managerial accounting differ from financial accounting?

Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP

419

Which financial reports are required to be filed with the SEC?

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

420

What is the focus of financial reports for individual companies?

Focus is on the needs of users to help them make decisions and assessments about the company

Does not make assessments of the economy

421

What are the Primary Constraints of Financial Reporting?

Cost vs. Benefit

Materiality

422

What are the Secondary Constraints of Financial Reporting?

Consistency - Year vs. Year

Comparability - Company vs. Company

423

What are the Qualitative Characteristics of Financial Reporting?

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


424

What are the Enhancing Qualitative Characteristics of Financial Reporting?

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

425

How does Conservatism affect the recording of accounting transactions?

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

426

What is an accrual?

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

427

What is a deferral?

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

428

What is recognition in accounting?

When an item is recorded and included in the financial statements

429

Describe fair value with respect to an asset

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

430

What market assumptions are made in a fair value assessment?

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

431

What items are included in a Level 1 input in the fair value hierarchy?

Price quotes or market prices

For example NYSE or NASDAQ

432

What items are included in a Level 2 valuation input?

Interest rates

Prime rate

433

What items are included in Level 3 inputs of the fair value hierarchy?

Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation

434

What are acceptable valuation techniques for fair value?

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

435

What are current assets?

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

436

What are current liabilities?

Liabilities that will use current assets during the present operating cycle

437

What is an accrued liability?

Expense that has been incurred but not paid

Example: rents payable

438

What is a deferred revenue?

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

439

When are revenues recognized?

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

440

What is a gain?

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

441

What is a loss?

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

442

What is an operating cycle?

Average time it takes to turn materials or services into Cash

443

What is the present value of future cash flows?

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

444

What is historical cost?

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

445

What is replacement cost?

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

446

What is a market cost?

The sale price of an asset (Exit Cost)

447

What is Net Realizable Value?

Sale Price of an Asset - Selling/Disposal Fee

448

When is royalty income recognized? How is it recognized?

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

449

When is revenue recognized in an installment sale?

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

450

What is deferred gross profit?

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

451

What is the cost recovery method?

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

452

What is subscription revenue? How is it recorded?

Payment has been received but performance is not complete.

As company performs revenue is recognized.

Recorded as a Deferred Revenue (Liability) on Balance Sheet

453

How are franchise revenues recorded?

Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized

454

How do you calculate sales revenue starting from cash basis income?

Mnemonic: SPEAR-BAR

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

455

How do you calculate COGS starting from Cash Basis?

Mnemonic: CRAP-I

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

456

How are discontinued operations reported? When are they used?

Reported Net of Tax after Continuing Operations but before Extraordinary Items

Company decides to cease operating a segment of its business (represents a strategic shift and has major effect on operations and financials)

Includes Income (or loss) from the period plus the gain (or loss) from disposal

457

For discontinued operations, what are the three requirements for disposal assets?

They must be Held for Sale - Sold - or Disposed of another way

458

What qualifies as an extraordinary item? How is it recorded?

Both unusual AND infrequent

Reported Net of Tax after Discontinued Operations

Note: Usual *or* Infrequent Items are reported as part of Continuing Operations

459

What is constant dollar accounting?

Adjusts assets to reflect a consistent level of purchasing power due to inflation

Uses the Consumer Price Index (CPI)

460

When are expenses recognized?

When they are incurred. Accrue if not yet paid.

461

What are accrued expenses?

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

462

When should impaired assets be written down to fair value and expensed?

Immediately.

463

What major items should be classified under General & Administrative (G&A) expenses?

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

464

What are business start-up costs?

One-time costs for opening a new business

Expensed as they are incurred

465

When is interest *not* expensed?

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

466

What are the major components of Comprehensive Income?

Net Income + Other Comprehensive Income (OCI):

Revenues/Expenses

Gains/Losses

Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity

467

What items are considered cumulative accounting adjustments?

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

468

What is the purpose of a reclassification adjustment?

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

469

Where is Comprehensive Income reported?

Reported in a Single or Combined Income Statement

470

What disclosures on accounting policies are required in financial statements?

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

471

What are some major risks and uncertainties that must be disclosed?

Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability

472

Under Cash Basis Accounting how are Revenue and Expenses recognized?

Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow

473

Is Cash Basis Accounting ok for Tax Returns?

Yes

474

Is Cash Basis Accounting GAAP?

No - GAAP uses Accrual Accounting

475

What is an advantage of Modified Cash Basis Accounting?

It avoids the complexities of GAAP but provides more information that Cash Basis Accounting

476

Is Modified Cash Basis GAAP?

No - GAAP uses Accrual Accounting

477

What are the 3 acceptable options for Income Tax Basis Accounting

Cash Basis - Accrual Basis - Hybrid Method

478

What are the advantages of the Small and Medium Sized Entity Framework?

It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)

479

What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?

Deferred Taxes Method and Taxes Payable Method

480

What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?

Expensed or Amortized (15 years)

481

How is Goodwill treated under the Small and Medium Sized Entity Framework?

Amortized (15 years)

482

What are the required liquidation basis financial statements?

Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation

483

What is a Development Stage Entity?

A company that is still in the formation stage and hasn't yet begun principal operations or produced significant revenue

484

What is the key benefit of the accounting rules for Development Stage Entities?

Cost savings without sacrificing financial statement usefulness

485

How are Research and Development costs recorded?

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

486

Which expenditures are included in the cost of a building?

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

487

Which expenditures are included in the cost of land?

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

488

In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?

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.

489

In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

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.

490

How is donated property recorded by the donee?

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

491

How is donation of property recorded by the donor?

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.

492

How is double-declining balance (DDB) depreciation calculated?

(1 / Useful Life) x 2 x Book Value

Ignore salvage value.

493

How is Sum of Year's Digits (SYD) depreciation calculated?

(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

494

How is straight line depreciation calculated?

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

495

When is an asset considered to be impaired? How is impairment loss calculated?

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

496

How are legal fees to defend a patent amortized?

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

If unsuccessful they are expensed immediately.

497

What are the two steps for testing goodwill impairment?

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.

498

How are costs for developing software recorded?

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.

499

What expenditures are included in the cost of equipment?

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.

500

What are the three major types of funds in governmental accounting?

Governmental, Proprietary, Fiduciary

501

Which two accounting bases are used in governmental accounting?

Accrual basis - current economic resources focus (revenues recognized when earned)

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

502

What is a budget appropriation?

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

503

What is an encumbrance?

Records purchase and reserves it for the encumbrance.

504

What is the opening budgetary entry?

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

505

What is the closing budgetary entry?

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

506

What are the types of governmental funds?

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

507

What is a General Fund?

The operating fund of the governmental unit

Records Significant Revenues: Taxes; Tickets; Fines; Licenses

Records Significant Expenditures: Police; Education; Fire Dept

508

What is a Special Revenue Fund?

Restricted for a specific purpose such as street repair.

509

What is a Permanent Fund?

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

Principal remains intact.

510

What is a Capital Projects Fund?

Used to acquire and build facilities.

511

What is a Debt Service Fund?

Handles repayment of long-term debt and related interest.

512

Which fund statements are issued in Governmental Accounting?

Balance Sheet

Statement of Revenues; Expenditures; and Changes in Fund Balance

513

When is Revenue recorded in Governmental Accounting?

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

514

What is Derived Tax Revenue?

Money collected from people doing things:

Sales tax (buying cars) or income tax (people working)

515

What is Imposed Tax Revenue?

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.

516

What are the types of Proprietary Funds?

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)

517

What are the Fund Balance Types?

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

518

What are the types of Fiduciary Funds?

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

519

How are Assets & Liabilities presented on the Statement of Net Position?

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

520

How are Capital Assets shown on a governmental Statement of Net Assets?

They are shown net of debt

Asset Cost - Accumulated Depreciation - Asset Liabilities : Net Assets

521

How is infrastructure reported on a governmental Statement of Net Assets?

Modified approach:

Reported at cost; no accumulated depreciation

522

How is a Statement of Net Assets divided?

Into Governmental Activities and Business Activities

523

How are activities presented in a Statement of Activities?

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.

524

What is the primary objective of governmental accounting?

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

525

What Financial Statements are required for Defined Benefit Pension plans?

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

526

What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?

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

527

What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?

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

528

What should be included in the Financial Statement notes for Defined Benefit Pension Plans?

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

529

Which organization's standards are the most authoritative in the hierarchy of international accounting?

The International Accounting Standards Board (IASB)

530

Where is the first place management should look for guidance on international recognition and accounting policies?

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

531

Which framework helps to develop standards for international accounting?

The IASB Framework

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

532

What is the objective of the IFRS framework?

To provide users with information on international accounting.

533

Which assumptions are followed within the IRFS framework?

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

534

What are the Qualitative Characteristics of accounting information within IFRS?

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

535

What are the Enhancing Characteristics of IFRS?

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

536

How does comparability differ under GAAP versus IFRS?

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.

537

What is the Pervasive Constraint within IFRS?

Cost vs. Benefit

538

Which items are considered reporting elements under IFRS?

Asset
Liability
Equity
Income
Expense

539

What are the criteria for recognition on IFRS financial statements?

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.

540

When transitioning to IFRS what type of financial statement must be produced for the first reporting period?

A full comparative statement using IFRS.

541

If IFRS was implemented in June 2012 for use in the December 31 2012 financial statements what is the Date of Transition?

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

542

For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?

The Fair Value election

543

Where on the financial statements are adjustments for adopting to IFRS made?

In the entity's retained earnings or equity

544

How is going concern different under IFRS than from GAAP?

Going Concern is an assumption under IFRS

545

How are extraordinary items treated under IFRS?

IFRS doesn't allow extraordinary items.

546

How is the completed contract method used under IFRS?

Completed contract method is not allowed under IFRS.

547

How is LIFO treated under IFRS?

IFRS does not allow LIFO.

548

Which financial statements are required under IFRS?

Statement of Comprehensive Income

Statement of Changes in Equity

549

How is the term income used in IFRS?

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

550

How is the term profit used in IFRS?

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

551

How does IFRS treat gains?

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

552

How does IFRS treat losses?

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

553

How does refinancing of current liabilities to long-term liabilities under IFRS differ from GAAP?

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.

554

How do contingent liabilities differ between GAAP and IFRS?

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.

555

How are bonds recorded under IFRS?

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

556

How are deferred taxes treated under IFRS?

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.

557

When can deferred tax assets and liabilities be netted under IFRS?

ONLY if they are related to the same country/taxing authority


For example China Deferred Tax Assets can't offset Japan Deferred Tax Liabilities

558

Which tax rates are used for calculating deferred tax assets/liabilities under IFRS?

The enacted rate or substantially enacted tax rate.

(GAAP is the enacted tax rate only)

559

Which items are recorded on the Income Statement in IFRS?

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

560

How are property plant and equipment (PP&E) recorded and valued under IFRS?

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

561

What are the requirements for using the revaluation model for PP&E under IFRS?

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

562

How is investment property reported under IFRS?

Initially recorded at cost

Revalued using either Fair Value model or Cost model

563

How is profit or loss recorded in the current period for investment property under the Fair Value model of IFRS?

Recorded on the Income Statement

Investment P/L : IS

PP&E P/L : OCI

564

Under IFRS how is investment property reported under the Cost Model?

Carried at Cost minus Accumulated Depreciation

Fair Value must still be disclosed in the notes to the financial statements

565

How are leases reported under IFRS?

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

566

How are intangible assets valued under IFRS?

Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss)

or

the Revaluation Model (Fair Value less Accumulated Depreciation)

567

How is internally generated goodwill reported under IFRS?

It is not recognized.

568

How is amortization of intangibles handled under IFRS?

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.

569

When must a lease be recorded as a Finance Lease under IFRS?

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

570

How are defined benefit plans recorded under IFRS?

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

571

How are interest expense and/or finance costs classified on an IFRS statement of cash flows?

They can be classified as either Operating or Financing

Once a classification is chosen all future costs must be classified there

572

How are significant non-cash transactions recorded on an IFRS statement of cash flows?

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

573

Which costs are inventoriable?

Purchases - Net of Discounts, Freight, Warehouse expenditures

574

When does ownership of goods transfer when shipped FOB Shipping Point?

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

575

When does ownership transfer when goods are sent FOB Destination?

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

576

Which costs are non-inventoriable?

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

577

When are discounts recorded under the gross method?

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

578

Under the net method, when are discounts recorded?

Under the net method, discounts are recorded whether used or not.

Unused discounts are allocated to financing expense.

579

How is gross margin calculated?

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

580

Describe the periodic inventory system.

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

581

Describe the perpetual inventory system.

Inventory count continually updated

Uses a moving-average cost flow method

582

In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

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

583

How is inventory turnover calculated?

COGS / Average Inventory

584

How is Average Day's Sales in inventory calculated?

365 / Inventory Turnover

585

Under a consignment system, who holds the consigned goods in inventory?

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

586

Under a consignment system, does the consignee hold consignment inventory in their own inventory?

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

587

What effect does overstatement or understatement of inventory have on ending retained earnings?

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

Misstatement of ENDING inventory does have an effect on retained earnings.

588

How does misstatement of ending inventory effect Ending Retained Earnings?

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

589

Which costs are included in COGS first under the FIFO (first in first out) system?

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

590

Which costs are included in COGS under the LIFO (last in first out) system?

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

591

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

COGAS / Total Units : Weighted Average Cost Per Unit

592

How does FIFO's COGS relate to LIFO's in a time of changing prices?

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

593

How do FIFO and LIFO change in a period of rising prices?

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

594

How do FIFO and LIFO change in a period of falling prices?

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

595

Under a Lower of Cost or Market, how are the benchmarks calculated?

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit

596

How are Available-For-Sale securities recorded on the Balance Sheet?

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

597

How are Available-For-Sale security Unrealized G/L treated?

Included in OCI (Other Comprehensive Income)

598

How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?

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

599

How are Held-to-Maturity securities recorded on the Balance Sheet?

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

600

How are Held-to-Maturity securities Unrealized G/L treated?

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


601

How are Trading Securities recorded on the Balance Sheet?

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.

602

How are Trading Securities Unrealized G/L treated?

Recorded on the Income Statement

If they are reclassified as HTM or AFS - there is no effect upon transfer.

603

How is a Capital Lease recorded?

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

604

What footnote disclosures are required for a Capital Lease?

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

605

What are the requirements for a Capital Lease for a lessor?

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

606

What are the characteristics of an Operating Lease for a lessee?

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.

607

What are the characteristics of an Operating Lease for a LESSOR?

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

608

What are the characteristics of a Direct Financing Lease?

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

609

How is a sale-leaseback recorded?

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

610

What are the characteristics of lease payments under an annuity due situation?

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

611

What are the characteristics of lease payments under an ordinary annuity situation?

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

612

What are the characteristics of a Capital Lease for a lessee?

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

613

Which financial statements are required for not - for - profit organizations?

Statement of Financial Position

Statement of Activities

Statement of Cash Flows

Statement of Functional Expense (Volunteer Health Organizations Only)

614

What are the major classifications found on a Statement of Financial Position?

Similar to Balance Sheet:

Assets
Liabilities
Net Assets
Unrestricted Assets
Permanently Restricted Assets
Temporarily Restricted Assets

615

What are the major classifications in a Statement of Activities?

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

616

What are the characteristics of a Statement of Cash Flows for not - for - profits? What are the major classifications?

Both direct and indirect methods are OK

Operating Activities - Unrestricted Revenues and Unrestricted Expenses

Investing Activities

Financing Activities - Endowments and restricted contributions


617

Which organizations are required to present a Statement of Functional Expenses?

Volunteer Health Organizations

618

Which statements are required for non - governmental hospitals?

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

619

Which basis of accounting is used for revenues and net assets?

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

620

What are the characteristics of unrestricted assets or revenue?

No restrictions or conditions placed on entity in order to use the resources

Note: assets earmarked internally by management are still unrestricted

621

When are revenues on contributions recognized?

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

622

When are services rendered considered contributions?

If the organization would have otherwise paid for them

or

They increase the value of a non - monetary asset

623

Is hospital charity care revenue?

NO.

It is disclosed in the notes to the financial statements only.

624

How are unconditional pledges to contribute recorded?

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

625

Which revenues are expenses deducted from?

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

626

What are the characteristics of temporarily restricted assets/revenue?

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

627

What are the characteristics of an endowment?

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

628

When is the donation of an art collection recognized as a contribution or asset?

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

629

When both Temporarily Restricted Assets and Unrestricted Assets are available for use - which assets are used first?

Temporarily restricted assets are used before Unrestricted assets.

630

How is a refundable advance recorded by a not for profit?

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

631

How are investments recorded and valued in not - for - profit accounting?

Fair Value is mostly used

Exception - Equity method used when significant influence exists

632

How are scholarships recorded?

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

633

How is depreciation expense recorded by a not - for - profit?

Depreciation expense is allocated proportionately to various functions

634

How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

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

635

If no goodwill is recorded upon admission of a new partner - which method is used for recording the new partner's interest?

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

636

If goodwill is recorded upon admission of a new partner - how is the partner's interest recorded?

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%)

637

At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?

Fair Value for assets contributed.

Present value of remaining cash flows for liabilities assumed.

638

Which Personal Financial Statements are required?

Required: Statement of Financial Condition (Statement of Changes in Net Worth is optional)

639

How are assets and liabilities valued in a Personal Financial Statement?

Estimated current value

640

How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a Personal Financial Statement?

Presented on Statement of Financial Condition between Liabilities and Net Worth

641

What is the general presentation on a statement of financial condition?

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

642

How is life insurance presented on a Personal Financial Statement?

Only shown if there is cash surrender value

It is shown net of loans against the policy

643

How are business interests shown on a Personal Financial Statement?

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

644

What is the discreet view in an Interim Financial Statement?

Interim period is a separate accounting period - not GAAP

Same accounting principles used for annual reporting should be used.

645

What is the integral view in an Interim Financial Statement?

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

646

How are discontinued operations & extraordinary items reported in Interim Financial Statements?

Aren't prorated

Fully recognized in Interim Period as incurred

If it occurs in Q3 - it's recognized in Q3

647

How are cumulative gains and losses reported in Interim Financials?

Reported as if they occurred in the first quarter

648

How is inventory valuation handled in Interim Financials?

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

649

What is one of the primary problems with interim reporting?

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

650

For whom is Segment Reporting required?

Publicly traded companies

651

What factors cause a segment to be significant and therefore to be reported separately?

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

652

What is the disclosure requirement regarding sales of 10% or more for one customer?

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

653

What items are included in operating activities on the Statement of Cash Flows?

Cash received from Customers- Interest & Dividends- Trading Securities

Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities

654

What items are included in investing activities on a Statement of Cash Flows?

Cash received: Sale of PP&E- Sale of Investments- Loan Principle

Cash paid: Loans- Acquisitions- AFS or HTM Securities- Taxes- Trading Securities

655

What items are included in Financing Activities in a Statement of Cash Flows?

Cash received: Issuance of Stock- Issuance of Debt

Cash paid: Dividends

656

What is the direct method for a Statement of Cash Flows?

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

657

What is the Indirect Method for a Statement of Cash Flows?

Starts with Net Income

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

658

When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

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

659

When is APIC recorded on a stock subscription?

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

660

To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

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

661

When are dividends in arrear recorded for cumulative preferred stock?

They are not accrued until declared.

662

When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

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.

663

What is the gain or loss when a non-monetary asset is distributed to a shareholder?

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

664

What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

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

665

When is Retained Earnings debited for FMV of Stock for a stock dividend?

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

666

When is Retained Earnings debited for Par Value for a stock dividend?

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

667

What is the effect of a stock dividend or a stock split on total shareholder equity?

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

668

What is the affect on APIC from a stock split?

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

669

When is compensation expense recorded at the time of grant for a stock option?

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

670

What interest rate is used to discount stock options?

The risk-free interest rate

671

What date is used as the measurement date for share-based payments classified as liabilities?

The settlement date.

672

How are compensation costs for share-based payments classified as liabilities measured?

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

673

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

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

674

What is the primary purpose of a quasi-reorganization?

To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors

675

How is return on Common Stockholder's Equity calculated?

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

676

How is book value per share of common stock calculated?

Total Shareholder Equity
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value

Book Value per Share : Total Book Value / Shares outstanding

677

How is the dividend per share payout ratio calculated?

Dividends per share / earnings per share

678

How is basic Earnings Per Share (EPS) calculated?

(Net Income - Preferred Dividends) / Average C/S Outstanding

Note - If cumulative- subtract the P/S dividend regardless of whether or not they're declared.

679

For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

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

680

For which areas is EPS required to be shown?

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

681

When do stock options increase share outstanding?

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

682

How is EPS calculated when convertible bonds are taken into consideration?

[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

683

How are changes in accounting principle applied?

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

684

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

A change of principle.

Applied retrospectively.

685

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

A change in accounting principle.

Applied retrospectively.

686

How is a change in accounting estimate applied?

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

687

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

688

How is a correction of an accounting error made?

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.

689

What are the requirements for a prior period adjustment?

Effect is Material

Is identifiable in Prior Period

Couldn't be estimated in Prior Periods

690

How is a change from a non-GAAP accounting method to a GAAP method recorded?

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

691

How does an inventory error effect the financial statements?

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.

692

How is a change in entity recorded?

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

693

How are changes in accounting principle applied?

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

694

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

A change of principle.

Applied retrospectively.

695

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

A change in accounting principle.

Applied retrospectively.

696

How is a change in accounting estimate applied?

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

697

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

698

How is a correction of an accounting error made?

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.

699

What are the requirements for a prior period adjustment?

Effect is Material

Is identifiable in Prior Period

Couldn't be estimated in Prior Periods

700

How is a change from a non-GAAP accounting method to a GAAP method recorded?

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

701

How does an inventory error effect the financial statements?

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.

702

How is a change in entity recorded?

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

703

What is a serial bond?

Any bond that matures in installments

704

What is a term bond?

Any bond that matures on a single date

705

What is a debenture bond?

A bond not secured by any collateral

706

What is a sinking fund bond?

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed

707

What is the formula to calculate proceeds of a bond sale?

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

708

How is the present value of a bond calculated?

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)

709

Which costs are included in bond issuance costs? How are they recorded?

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

710

How are bonds reported when classified as trading securities?

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

711

How are bonds amortized under the interest method?

Both discount and premium amortization amounts increase each year

712

Describe the book value method when converting from bonds to stocks.

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

713

What is the stated rate for a bond?

Rate on the face of the bond

714

What is the market rate on a bond?

Rate that bonds are currently selling for

715

What happens when the bond's market rate is greater than the stated rate?

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

716

What happens when a bond's market rate is less than the stated rate?

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

717

How does accrued interest on a bond affect the purchase price?

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.

718

When does interest expense start accruing on a bond?

When the bonds are issued

719

How is an interest payment on a bond calculated?

Cash for payment : Stated rate x Face amount

720

What amount of interest is expensed on a bond interest payment?

Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount

721

What are convertible bonds? Which recording method is used?

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

722

How is the retirement of bonds recorded?

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

723

When is a gain recognized in a debt restructuring?

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

724

What is the gain recognized under a settlement of debt?

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

725

For a creditor; how is a loan impairment recorded?

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

726

When is the fair value method used for recording interest in a separate company?

20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period

727

When is the equity method used when purchasing another company's stock? How is it recorded?

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

728

When are companies required to file consolidated financials? How is it recorded?

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

729

When is consolidation not required?

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

730

What occurs under a step acquisition?

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

731

What is the difference between an acquisition and a merger?

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

732

How are acquisition costs recorded in a merger?

Expensed in period incurred - i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional

Netted against stock proceeds:
Stock registration and issuance costs

733

What is a current asset?

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

734

What is a current liability?

A liability expected to be paid within 12 months or less

735

How is the Quick Ratio calculated?

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

736

How is the Current Ratio calculated?

Currents Assets / Current Liabilities

737

How is Working Capital calculated?

Currents Assets - Current Liabilities

738

How is A/R Turnover calculated?

Credit Sales / Average A/R

739

How is Inventory Turnover calculated?

COGS / Average Inventory

740

How is Day Sales in Inventory calculated?

365 / Inventory Turnover

741

How is Days to Collect A/R calculated?

Average A/R / Average Sales per Day

742

How are gain contingencies recorded?

They are NOT accrued due to Conservatism

743

When are loss contingencies recorded?

If Probable - they are accrued (if estimable) and disclosed

If Reasonably Possible - they are disclosed

If Remote - don't accrue or disclose

744

What is a temporary difference related to deferred taxes?

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

745

What is a deferred tax asset?

Deduction will reduce future income taxes expense.

746

What is a deferred tax liability?

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

747

Which period's tax rate is used to calculate a deferred tax asset or liability?

The FUTURE enacted tax rate not the current one.

It is never discounted to present value.

748

What valuation allowance is used with respect to a deferred tax asset?

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

749

What effect do permanent differences have on deferred income taxes?

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

750

What is deferred income tax expense?

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

751

How are deferred tax assets classified as current or non-current on the balance sheet?

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

752

How are derivatives recorded?

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

753

How are unrealized gains/losses on trading securities recorded?

Recorded on income statement

754

How are gains and losses on Available for Sale (AFS) securities recorded?

They are included in Other Comprehensive Income.

755

What is a Fair Value Hedge? How is it recorded?

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

756

What is a Cash Flow Hedge? How is it recorded?

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.

757

Where are gains and losses on foreign currency hedges recorded?

In Other Comprehensive Income (OCI)

758

What disclosures are required for derivative transactions?

Objectives and Strategies

Context to help investor understand the instrument

Risk Management Policies

Complete List of Hedged Instruments

759

How do transactions denominated in in a currency other than a company's functional currency affect the income statement?

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

760

What causes a Foreign Currency Transaction G/L?

A change in exchange rates between the functional currency and the transaction currency

761

Where are Foreign Currency Transaction G/L recorded?

Income Statement

762

Where are Foreign Currency Translation G/L recorded?

OCI

763

If the Functional Currency equals the Local Currency - what rate is used for translating Assets and Liabilities?

Current Rate as of the Balance Sheet Date

764

If the Functional Currency equals the Local Currency - what rate is used for translating Revenues and Expenses?

Weighted Average Exchange Rate for the year

765

If the Functional Currency equals the Reporting Currency - what Exchangee Rate is used??

Use Weighted Average - Historical Exchange Rates (Inventory and Pre-paid Assets and Property Plant and Equipment) and Current Exchange Rates (Monetary Assets and Liabilities and Inventory @ Market and Trading Securities and Deferred Taxes)

766

What is the primary objective of accounting?

To measure income

767

What is the most authoritative set of accounting pronouncements?

The FASB Codification

All pronouncements fall under the Codification umbrella

768

What are the 2 Levels of Authority within the FASB codification?

Authoritative and Non-Authoritative

769

How does managerial accounting differ from financial accounting?

Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP

770

Which financial reports are required to be filed with the SEC?

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

771

What is the focus of financial reports for individual companies?

Focus is on the needs of users to help them make decisions and assessments about the company

Does not make assessments of the economy

772

What are the Primary Constraints of Financial Reporting?

Cost vs. Benefit

Materiality

773

What are the Secondary Constraints of Financial Reporting?

Consistency - Year vs. Year

Comparability - Company vs. Company

774

What are the Qualitative Characteristics of Financial Reporting?

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


775

What are the Enhancing Qualitative Characteristics of Financial Reporting?

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

776

How does Conservatism affect the recording of accounting transactions?

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

777

What is an accrual?

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

778

What is a deferral?

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

779

What is recognition in accounting?

When an item is recorded and included in the financial statements

780

Describe fair value with respect to an asset

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

781

What market assumptions are made in a fair value assessment?

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

782

What items are included in a Level 1 input in the fair value hierarchy?

Price quotes or market prices

For example NYSE or NASDAQ

783

What items are included in a Level 2 valuation input?

Interest rates

Prime rate

784

What items are included in Level 3 inputs of the fair value hierarchy?

Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation

785

What are acceptable valuation techniques for fair value?

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

786

What are current assets?

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

787

What are current liabilities?

Liabilities that will use current assets during the present operating cycle

788

What is an accrued liability?

Expense that has been incurred but not paid

Example: rents payable

789

What is a deferred revenue?

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

790

When are revenues recognized?

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

791

What is a gain?

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

792

What is a loss?

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

793

What is an operating cycle?

Average time it takes to turn materials or services into Cash

794

What is the present value of future cash flows?

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

795

What is historical cost?

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

796

What is replacement cost?

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

797

What is a market cost?

The sale price of an asset (Exit Cost)

798

What is Net Realizable Value?

Sale Price of an Asset - Selling/Disposal Fee

799

When is royalty income recognized? How is it recognized?

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

800

When is revenue recognized in an installment sale?

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

801

What is deferred gross profit?

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

802

What is the cost recovery method?

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

803

What is subscription revenue? How is it recorded?

Payment has been received but performance is not complete.

As company performs revenue is recognized.

Recorded as a Deferred Revenue (Liability) on Balance Sheet

804

How are franchise revenues recorded?

Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized

805

How do you calculate sales revenue starting from cash basis income?

Mnemonic: SPEAR-BAR

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

806

How do you calculate COGS starting from Cash Basis?

Mnemonic: CRAP-I

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

807

How are discontinued operations reported? When are they used?

Reported Net of Tax after Continuing Operations but before Extraordinary Items

Company decides to cease operating a segment of its business (represents a strategic shift and has major effect on operations and financials)

Includes Income (or loss) from the period plus the gain (or loss) from disposal

808

For discontinued operations, what are the three requirements for disposal assets?

They must be Held for Sale - Sold - or Disposed of another way

809

What qualifies as an extraordinary item? How is it recorded?

Both unusual AND infrequent

Reported Net of Tax after Discontinued Operations

Note: Usual *or* Infrequent Items are reported as part of Continuing Operations

810

What is constant dollar accounting?

Adjusts assets to reflect a consistent level of purchasing power due to inflation

Uses the Consumer Price Index (CPI)

811

When are expenses recognized?

When they are incurred. Accrue if not yet paid.

812

What are accrued expenses?

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

813

When should impaired assets be written down to fair value and expensed?

Immediately.

814

What major items should be classified under General & Administrative (G&A) expenses?

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

815

What are business start-up costs?

One-time costs for opening a new business

Expensed as they are incurred

816

When is interest *not* expensed?

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

817

What are the major components of Comprehensive Income?

Net Income + Other Comprehensive Income (OCI):

Revenues/Expenses

Gains/Losses

Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity

818

What items are considered cumulative accounting adjustments?

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

819

What is the purpose of a reclassification adjustment?

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

820

Where is Comprehensive Income reported?

Reported in a Single or Combined Income Statement

821

What disclosures on accounting policies are required in financial statements?

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

822

What are some major risks and uncertainties that must be disclosed?

Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability

823

Under Cash Basis Accounting how are Revenue and Expenses recognized?

Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow

824

Is Cash Basis Accounting ok for Tax Returns?

Yes

825

Is Cash Basis Accounting GAAP?

No - GAAP uses Accrual Accounting

826

What is an advantage of Modified Cash Basis Accounting?

It avoids the complexities of GAAP but provides more information that Cash Basis Accounting

827

Is Modified Cash Basis GAAP?

No - GAAP uses Accrual Accounting

828

What are the 3 acceptable options for Income Tax Basis Accounting

Cash Basis - Accrual Basis - Hybrid Method

829

What are the advantages of the Small and Medium Sized Entity Framework?

It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)

830

What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?

Deferred Taxes Method and Taxes Payable Method

831

What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?

Expensed or Amortized (15 years)

832

How is Goodwill treated under the Small and Medium Sized Entity Framework?

Amortized (15 years)

833

What are the required liquidation basis financial statements?

Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation

834

What is a Development Stage Entity?

A company that is still in the formation stage and hasn't yet begun principal operations or produced significant revenue

835

What is the key benefit of the accounting rules for Development Stage Entities?

Cost savings without sacrificing financial statement usefulness

836

How are Research and Development costs recorded?

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

837

Which expenditures are included in the cost of a building?

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

838

Which expenditures are included in the cost of land?

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

839

In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?

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.

840

In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

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.

841

How is donated property recorded by the donee?

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

842

How is donation of property recorded by the donor?

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.

843

How is double-declining balance (DDB) depreciation calculated?

(1 / Useful Life) x 2 x Book Value

Ignore salvage value.

844

How is Sum of Year's Digits (SYD) depreciation calculated?

(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

845

How is straight line depreciation calculated?

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

846

When is an asset considered to be impaired? How is impairment loss calculated?

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

847

How are legal fees to defend a patent amortized?

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

If unsuccessful they are expensed immediately.

848

What are the two steps for testing goodwill impairment?

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.

849

How are costs for developing software recorded?

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.

850

What expenditures are included in the cost of equipment?

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.

851

What are the three major types of funds in governmental accounting?

Governmental, Proprietary, Fiduciary

852

Which two accounting bases are used in governmental accounting?

Accrual basis - current economic resources focus (revenues recognized when earned)

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

853

What is a budget appropriation?

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

854

What is an encumbrance?

Records purchase and reserves it for the encumbrance.

855

What is the opening budgetary entry?

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

856

What is the closing budgetary entry?

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

857

What are the types of governmental funds?

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

858

What is a General Fund?

The operating fund of the governmental unit

Records Significant Revenues: Taxes; Tickets; Fines; Licenses

Records Significant Expenditures: Police; Education; Fire Dept

859

What is a Special Revenue Fund?

Restricted for a specific purpose such as street repair.

860

What is a Permanent Fund?

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

Principal remains intact.

861

What is a Capital Projects Fund?

Used to acquire and build facilities.

862

What is a Debt Service Fund?

Handles repayment of long-term debt and related interest.

863

Which fund statements are issued in Governmental Accounting?

Balance Sheet

Statement of Revenues; Expenditures; and Changes in Fund Balance

864

When is Revenue recorded in Governmental Accounting?

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

865

What is Derived Tax Revenue?

Money collected from people doing things:

Sales tax (buying cars) or income tax (people working)

866

What is Imposed Tax Revenue?

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.

867

What are the types of Proprietary Funds?

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)

868

What are the Fund Balance Types?

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

869

What are the types of Fiduciary Funds?

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

870

How are Assets & Liabilities presented on the Statement of Net Position?

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

871

How are Capital Assets shown on a governmental Statement of Net Assets?

They are shown net of debt

Asset Cost - Accumulated Depreciation - Asset Liabilities : Net Assets

872

How is infrastructure reported on a governmental Statement of Net Assets?

Modified approach:

Reported at cost; no accumulated depreciation

873

How is a Statement of Net Assets divided?

Into Governmental Activities and Business Activities

874

How are activities presented in a Statement of Activities?

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.

875

What is the primary objective of governmental accounting?

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

876

What Financial Statements are required for Defined Benefit Pension plans?

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

877

What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?

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

878

What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?

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

879

What should be included in the Financial Statement notes for Defined Benefit Pension Plans?

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

880

Which organization's standards are the most authoritative in the hierarchy of international accounting?

The International Accounting Standards Board (IASB)

881

Where is the first place management should look for guidance on international recognition and accounting policies?

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

882

Which framework helps to develop standards for international accounting?

The IASB Framework

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

883

What is the objective of the IFRS framework?

To provide users with information on international accounting.

884

Which assumptions are followed within the IRFS framework?

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

885

What are the Qualitative Characteristics of accounting information within IFRS?

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

886

What are the Enhancing Characteristics of IFRS?

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

887

How does comparability differ under GAAP versus IFRS?

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.

888

What is the Pervasive Constraint within IFRS?

Cost vs. Benefit

889

Which items are considered reporting elements under IFRS?

Asset
Liability
Equity
Income
Expense

890

What are the criteria for recognition on IFRS financial statements?

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.

891

When transitioning to IFRS what type of financial statement must be produced for the first reporting period?

A full comparative statement using IFRS.

892

If IFRS was implemented in June 2012 for use in the December 31 2012 financial statements what is the Date of Transition?

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

893

For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?

The Fair Value election

894

Where on the financial statements are adjustments for adopting to IFRS made?

In the entity's retained earnings or equity

895

How is going concern different under IFRS than from GAAP?

Going Concern is an assumption under IFRS

896

How are extraordinary items treated under IFRS?

IFRS doesn't allow extraordinary items.

897

How is the completed contract method used under IFRS?

Completed contract method is not allowed under IFRS.

898

How is LIFO treated under IFRS?

IFRS does not allow LIFO.

899

Which financial statements are required under IFRS?

Statement of Comprehensive Income

Statement of Changes in Equity

900

How is the term income used in IFRS?

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

901

How is the term profit used in IFRS?

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

902

How does IFRS treat gains?

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

903

How does IFRS treat losses?

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

904

How does refinancing of current liabilities to long-term liabilities under IFRS differ from GAAP?

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.

905

How do contingent liabilities differ between GAAP and IFRS?

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.

906

How are bonds recorded under IFRS?

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

907

How are deferred taxes treated under IFRS?

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.

908

When can deferred tax assets and liabilities be netted under IFRS?

ONLY if they are related to the same country/taxing authority


For example China Deferred Tax Assets can't offset Japan Deferred Tax Liabilities

909

Which tax rates are used for calculating deferred tax assets/liabilities under IFRS?

The enacted rate or substantially enacted tax rate.

(GAAP is the enacted tax rate only)

910

Which items are recorded on the Income Statement in IFRS?

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

911

How are property plant and equipment (PP&E) recorded and valued under IFRS?

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

912

What are the requirements for using the revaluation model for PP&E under IFRS?

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

913

How is investment property reported under IFRS?

Initially recorded at cost

Revalued using either Fair Value model or Cost model

914

How is profit or loss recorded in the current period for investment property under the Fair Value model of IFRS?

Recorded on the Income Statement

Investment P/L : IS

PP&E P/L : OCI

915

Under IFRS how is investment property reported under the Cost Model?

Carried at Cost minus Accumulated Depreciation

Fair Value must still be disclosed in the notes to the financial statements

916

How are leases reported under IFRS?

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

917

How are intangible assets valued under IFRS?

Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss)

or

the Revaluation Model (Fair Value less Accumulated Depreciation)

918

How is internally generated goodwill reported under IFRS?

It is not recognized.

919

How is amortization of intangibles handled under IFRS?

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.

920

When must a lease be recorded as a Finance Lease under IFRS?

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

921

How are defined benefit plans recorded under IFRS?

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

922

How are interest expense and/or finance costs classified on an IFRS statement of cash flows?

They can be classified as either Operating or Financing

Once a classification is chosen all future costs must be classified there

923

How are significant non-cash transactions recorded on an IFRS statement of cash flows?

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

924

Which costs are inventoriable?

Purchases - Net of Discounts, Freight, Warehouse expenditures

925

When does ownership of goods transfer when shipped FOB Shipping Point?

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

926

When does ownership transfer when goods are sent FOB Destination?

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

927

Which costs are non-inventoriable?

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

928

When are discounts recorded under the gross method?

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

929

Under the net method, when are discounts recorded?

Under the net method, discounts are recorded whether used or not.

Unused discounts are allocated to financing expense.

930

How is gross margin calculated?

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

931

Describe the periodic inventory system.

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

932

Describe the perpetual inventory system.

Inventory count continually updated

Uses a moving-average cost flow method

933

In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

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

934

How is inventory turnover calculated?

COGS / Average Inventory

935

How is Average Day's Sales in inventory calculated?

365 / Inventory Turnover

936

Under a consignment system, who holds the consigned goods in inventory?

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

937

Under a consignment system, does the consignee hold consignment inventory in their own inventory?

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

938

What effect does overstatement or understatement of inventory have on ending retained earnings?

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

Misstatement of ENDING inventory does have an effect on retained earnings.

939

How does misstatement of ending inventory effect Ending Retained Earnings?

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

940

Which costs are included in COGS first under the FIFO (first in first out) system?

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

941

Which costs are included in COGS under the LIFO (last in first out) system?

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

942

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

COGAS / Total Units : Weighted Average Cost Per Unit

943

How does FIFO's COGS relate to LIFO's in a time of changing prices?

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

944

How do FIFO and LIFO change in a period of rising prices?

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

945

How do FIFO and LIFO change in a period of falling prices?

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

946

Under a Lower of Cost or Market, how are the benchmarks calculated?

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit

947

How are Available-For-Sale securities recorded on the Balance Sheet?

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

948

How are Available-For-Sale security Unrealized G/L treated?

Included in OCI (Other Comprehensive Income)

949

How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?

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

950

How are Held-to-Maturity securities recorded on the Balance Sheet?

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

951

How are Held-to-Maturity securities Unrealized G/L treated?

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


952

How are Trading Securities recorded on the Balance Sheet?

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.

953

How are Trading Securities Unrealized G/L treated?

Recorded on the Income Statement

If they are reclassified as HTM or AFS - there is no effect upon transfer.

954

How is a Capital Lease recorded?

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

955

What footnote disclosures are required for a Capital Lease?

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

956

What are the requirements for a Capital Lease for a lessor?

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

957

What are the characteristics of an Operating Lease for a lessee?

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.

958

What are the characteristics of an Operating Lease for a LESSOR?

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

959

What are the characteristics of a Direct Financing Lease?

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

960

How is a sale-leaseback recorded?

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

961

What are the characteristics of lease payments under an annuity due situation?

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

962

What are the characteristics of lease payments under an ordinary annuity situation?

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

963

What are the characteristics of a Capital Lease for a lessee?

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

964

Which financial statements are required for not - for - profit organizations?

Statement of Financial Position

Statement of Activities

Statement of Cash Flows

Statement of Functional Expense (Volunteer Health Organizations Only)

965

What are the major classifications found on a Statement of Financial Position?

Similar to Balance Sheet:

Assets
Liabilities
Net Assets
Unrestricted Assets
Permanently Restricted Assets
Temporarily Restricted Assets

966

What are the major classifications in a Statement of Activities?

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

967

What are the characteristics of a Statement of Cash Flows for not - for - profits? What are the major classifications?

Both direct and indirect methods are OK

Operating Activities - Unrestricted Revenues and Unrestricted Expenses

Investing Activities

Financing Activities - Endowments and restricted contributions


968

Which organizations are required to present a Statement of Functional Expenses?

Volunteer Health Organizations

969

Which statements are required for non - governmental hospitals?

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

970

Which basis of accounting is used for revenues and net assets?

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

971

What are the characteristics of unrestricted assets or revenue?

No restrictions or conditions placed on entity in order to use the resources

Note: assets earmarked internally by management are still unrestricted

972

When are revenues on contributions recognized?

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

973

When are services rendered considered contributions?

If the organization would have otherwise paid for them

or

They increase the value of a non - monetary asset

974

Is hospital charity care revenue?

NO.

It is disclosed in the notes to the financial statements only.

975

How are unconditional pledges to contribute recorded?

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

976

Which revenues are expenses deducted from?

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

977

What are the characteristics of temporarily restricted assets/revenue?

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

978

What are the characteristics of an endowment?

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

979

When is the donation of an art collection recognized as a contribution or asset?

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

980

When both Temporarily Restricted Assets and Unrestricted Assets are available for use - which assets are used first?

Temporarily restricted assets are used before Unrestricted assets.

981

How is a refundable advance recorded by a not for profit?

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

982

How are investments recorded and valued in not - for - profit accounting?

Fair Value is mostly used

Exception - Equity method used when significant influence exists

983

How are scholarships recorded?

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

984

How is depreciation expense recorded by a not - for - profit?

Depreciation expense is allocated proportionately to various functions

985

How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

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

986

If no goodwill is recorded upon admission of a new partner - which method is used for recording the new partner's interest?

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

987

If goodwill is recorded upon admission of a new partner - how is the partner's interest recorded?

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%)

988

At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?

Fair Value for assets contributed.

Present value of remaining cash flows for liabilities assumed.

989

Which Personal Financial Statements are required?

Required: Statement of Financial Condition (Statement of Changes in Net Worth is optional)

990

How are assets and liabilities valued in a Personal Financial Statement?

Estimated current value

991

How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a Personal Financial Statement?

Presented on Statement of Financial Condition between Liabilities and Net Worth

992

What is the general presentation on a statement of financial condition?

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

993

How is life insurance presented on a Personal Financial Statement?

Only shown if there is cash surrender value

It is shown net of loans against the policy

994

How are business interests shown on a Personal Financial Statement?

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

995

What is the discreet view in an Interim Financial Statement?

Interim period is a separate accounting period - not GAAP

Same accounting principles used for annual reporting should be used.

996

What is the integral view in an Interim Financial Statement?

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

997

How are discontinued operations & extraordinary items reported in Interim Financial Statements?

Aren't prorated

Fully recognized in Interim Period as incurred

If it occurs in Q3 - it's recognized in Q3

998

How are cumulative gains and losses reported in Interim Financials?

Reported as if they occurred in the first quarter

999

How is inventory valuation handled in Interim Financials?

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

1000

What is one of the primary problems with interim reporting?

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

1001

For whom is Segment Reporting required?

Publicly traded companies

1002

What factors cause a segment to be significant and therefore to be reported separately?

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

1003

What is the disclosure requirement regarding sales of 10% or more for one customer?

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

1004

What items are included in operating activities on the Statement of Cash Flows?

Cash received from Customers- Interest & Dividends- Trading Securities

Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities

1005

What items are included in investing activities on a Statement of Cash Flows?

Cash received: Sale of PP&E- Sale of Investments- Loan Principle

Cash paid: Loans- Acquisitions- AFS or HTM Securities- Taxes- Trading Securities

1006

What items are included in Financing Activities in a Statement of Cash Flows?

Cash received: Issuance of Stock- Issuance of Debt

Cash paid: Dividends

1007

What is the direct method for a Statement of Cash Flows?

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

1008

What is the Indirect Method for a Statement of Cash Flows?

Starts with Net Income

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

1009

When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

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

1010

When is APIC recorded on a stock subscription?

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

1011

To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

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

1012

When are dividends in arrear recorded for cumulative preferred stock?

They are not accrued until declared.

1013

When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

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.

1014

What is the gain or loss when a non-monetary asset is distributed to a shareholder?

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

1015

What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

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

1016

When is Retained Earnings debited for FMV of Stock for a stock dividend?

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

1017

When is Retained Earnings debited for Par Value for a stock dividend?

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

1018

What is the effect of a stock dividend or a stock split on total shareholder equity?

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

1019

What is the affect on APIC from a stock split?

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

1020

When is compensation expense recorded at the time of grant for a stock option?