CPA FAR Flashcards
(269 cards)
1
Q
When are Gain Contingencies recognized?
A
Never. This would be the recgniztion of revenue prior to realization. They are disclosed in the notes only.
2
Q
Vulnerability to Concentrations refers to…
A
Risk due to lack of diversification. Disclosure must be made if criteria is met.
3
Q
Vulnerability to concentrations must be disclosed when…
A
The Following Criteria is met:
1. The concentration exists at the date of the FS
2 The concentration makes the entity vulnerable to the risk of a near-term severe impact
3. It is at least reasonably possible that the events could cause the severe impact in the near term
4
Q
Impaired long-lived assets to be disposed of by sale that are subject to the reporting requirements of FASB ASC 360-10-35 are measured at:
A
Lower of the Fair Value less costs to sell or carrying amount
5
Q
Basic EPS Formula
A
(Net Income / Weighted Average Common Stock Outstanding) Net Income must be reduced by preferred cumulative dividends
6
Q
3 Primary Criteria for reporting operating segments
A
Revenues, Assets, or profit and loss equals 10% or more of combined operating segments
7
Q
FASB ASC 805-20-55-4 requires long-term customer-relationship intangible assets to be:
A
subject to the same impairment loss recognition as other long-lived intangible assets that are held and used.
8
Q
Where and how is Basic EPS reported?
A
Basic EPS is reported on the Face of the income statement
9
Q
A private company may elect any one of the following accounting alternatives when considering the fair value intangible assets
A. assessing the nature of the difference between the carrying amount of an investment and the amount of underlying equity.
B. adopting fresh-start reporting.
C. applying the acquisition method.
D. applying the pooling of interest method.
A
A private company may elect any one of the following accounting alternatives:
- Assessing the nature of the difference between the carrying amount of an investment and the amount of the underlying equity in net assets of an investee when applying the equity method
- Adopting fresh-start reporting
- Applying the acquistion method
10
Q
“Options to purchase common stock are excluded from the computation of diluted EPS if:
A
Their exercise price is greater than the average market price
11
Q
What is a monetary asset?
A
Monetary assets are cash or items whose amounts are fixed in terms of numbers of dollars. For example: Advances to unconsolidated subsidiaries, Allowance for uncollectible accounts, Unamortized premium on bonds payable. Depreciation is not considered a monetary unit.
12
Q
How should a company report its decision to change from a cash basis of accounting to accrual basis of accounting?
A
As a correction of an error (net of tax), by adjusting the beginning balance of retained earnings
13
Q
An entity shall subsequently measure each class of servicing assets and servicing liabilities using either of the following methods:
A
Amortization method. - Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income (if servicing revenues exceed servicing costs) or net servicing loss (if servicing costs exceed servicing revenues), and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.
Fair value measurement method. - Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value of servicing assets and servicing liabilities in earnings in the period in which the changes occur.
14
Q
When should costs of one time termination benefits be recorded?
A
They should be recorded and measured at its Fair Value on the communication date.
15
Q
FASB ASC 850 Related Party Disclosures
A
a. The nature of the relationship between the related parties
b. A description of the related party transaction
c. The dollar amount of transactions for each of the periods for which an income statement is presented and the effects of any change in the method of establishing the terms from that used in the preceding period
d. Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement
16
Q
3 Characteristics of a derivative financial instrument
NUNS
A
- There is an underlying or notional amount
- There is little or no initial net investment
- Its term requires or permits net settlement
17
Q
Types of leases tested for impairment (4)
A
- Capital Leases or lessees
- Long-lived assets of lessor subject to operating leases
- Proved oil and gas properties that are being accounted for using the successful-efforts method of accounting
- Long-term prepaid assets
18
Q
FASB ASC 825 Fair Value Option
A
The Statement permits election of fair value measurement on a contract by contract basis
19
Q
Proper accounting for losses when non-monetary assets are exchanged for other non-monetary assets?
A
A loss is recognized immediately because assets received should not be valued at more than their cash equivalent price
20
Q
FASB ASC 985 Software Amortization
A
The annual amortization shall be the greater of the amount computed using:
1. The ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or
- The straight-line method over the remaining estimated economic life of the product including the period being reported on.
21
Q
An accounting error is found in a prior year FS, what is the proper way to handle this?
A
A correction of an accounting error must be reported by restating the financial statements for all prior years. The carrying amounts for assets, liabilities, and beginning retained earnings must be restated for the earliest year presented in the financial statements presented in the year the error is discovered.
22
Q
if a change in the provisions of a capital lease gives rise to a new agreement classified as an operating lease, the transaction shall be accounted for under?
A
The Sale-leaseback requirements
23
Q
Discontinued Operations result from a disposal that represents a strategic shift. What are some examples?
A
a sale of a product line that represents 15% of the entity’s total revenues;
a sale of a geographical area that represents 20% of the entity’s total assets;
a sale of the entity’s stores in one of its two types of store formats that have provided 15% of current-period net income and have, in the past, represented 30% to 40% of the entity’s net income;
the sale of an equity method investment representing 20% of the entity’s total assets; or
the sale of 80% of a product line representing 40% of total revenue, but only if the entity retains 20% of its ownership interest.
24
Q
A foreign subsidiary of a U.S. parent company should measure its assets, liabilities and operations using the:
A
subsidiary’s functional currency
25
Accounting for sales with Leasebacks. Recognition of profit or loss on sales with leasebacks circumstances
a. If the seller-lessee retains the use of only a minor part of the property or a minor part of the remaining life, the sale and the lease are accounted for on the basis of their separate terms. If the lease rentals are unreasonable, however, an appropriate amount is deferred or accrued by adjusting the gain or loss on the sale. The amount deferred or accrued is then amortized as an adjustment to the rentals.
b. If the seller-lessee retains the use of a significant part, but less than substantially all of the property, and the profit on the sale exceeds the present value of the minimum lease payments in the leaseback in an operating lease or the recorded amount of the leased asset in a capital lease, the excess is recognized as profit on the date of the sale.
c. When the fair value of the property, at the time of the transaction, is less than its undepreciated cost, the seller-lessee must immediately recognize the loss.
26
FASB ASC 825 Lists items that are not eligible for the Fair Value Election. Can you name a few?
1. An investment in a subsidiary that the entity is required to consolidate
2. An interest in a variable interest entity that the entity is required to consolidate
3. Financial assets and liabilities recognized under leases
27
How should a capital lease be depreciated?
“the asset recorded under a capital lease shall be amortized depending on the provisions of the lease. When a bargain purchase option exists or ownership of the leased asset reverts to the lessee, depreciation should be computed over the useful life of the assets using estimated salvage value at the end of that life.” (In other cases, the lessee computes depreciation over the lease term using residual value at the end of the lease term.)
28
A financial instrument that embodies an unconditional obligation, or one other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares must be classified as a liability if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following:
A. A fixed monetary amount known at inception
B. Variations in something other than the fair value of the issuer's equity shares
C. Variations inversely related to changes in the fair value of the issuer's equity shares
D. Any one of the conditions listed
1. A fixed monetary amount known at inception (for example, a payable settleable with a variable number of the issuer's equity shares)
2. Variations in something other than the fair value of the issuer's equity shares (for example, a financial instrument indexed to the Standard and Poor's 500 and settleable with a variable number of the issuer's equity shares)
3. Variations inversely related to changes in the fair value of the issuer's equity shares (for example, a written put option that could be net share settled)
29
Business combinations accounted for as an acquisition should treat expenses related to the combination as follows:
1. Out-of-pocket costs such as fees of finders and consultants are expensed.
2. Issuance costs such as SEC filing fees are charged to the paid-in-capital account.
30
Under IFRS, which revenue recognition method should be used if the outcome of rendering services cannot reliably be estimated?
The same as GAAP, The Cost Recovery Method
31
IFRS - When a company has decided to discontinue operations of a component unit, the loss on disposal should...
Include operating losses of the current period
32
IFRS - Disclosure of the entity's financial instruments are required when...
When its practicable to estimate those values, or if the aggregated fair values are material to the entity
33
All expenses reported on the statement of activities for a not for profit are reported for as a decrease in...
Unrestricted Net Assets
34
N4P - A Statement of activities is similar to a business entity's...
Income Statement
35
How should a nongovernmental not-for-profit organization report investments in its financial statements?
Investments should be reported at fair value on the statement of financial position with gains and losses reported on the statement of activities as a change in net assets.
36
N4P - What happens when assets are released from restriction? Net assets categories.
When assets are released from restriction, the unrestricted category of net assets increases as the temporarily restricted category decreases.
37
What is the primary purpose of the statement of activities for not-for-profit organizations?
To report the change of net assets for the period
38
N4P - Contribution revenues and assets or expenses should be reported for donated services if:
- Special skills are required to perform the service,
- The individual providing the service has those special skills, and
- The organization would have to buy the services if they were not donated.Definition
39
Acceptable accounting when NFP entities accept unconditional promises tot give
- NFPs may use the fair value at the date a promise to give securities was initially recognized even if the contribution will not take place for several years.
- when promises to give cash are initially recognized, the amount recorded could be based on the present value of estimated future cash flows.
- when promises to give cash are initially recognized, the amount recognized should exclude amounts expected to be uncollectible.
40
N4P - When should noncompliance with donor imposed restrictions be disclosed
- If there is a reasonable possibility that a material contingent liability has been incurred at the date of the financial statements
- If there is at least a reasonable possibility that the noncompliance could lead to a material loss of revenue
- If it could cause an entity to be unable to continue as a going concern
41
The three categories of net assets reported for nongovernmental not-for-profit entities are:
- Unrestricted net assets
- Temporarily restricted (by donors or grantors) net assets
- Permanently restricted (by donors or grantors) net assets
42
Financial Statements required for voluntary health and welfare organizations.
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
Statement of Functional Expenses
43
How should a nongovernmental not-for-profit entity classify gains and losses on investments purchased with permanently restricted assets?
Investment gains and losses are reported as unrestricted revenues in the statement of activities unless the donor of the principal investment amount has explicitly instructed otherwise. The statement of activities is focused on clarifying whether revenues are unrestricted, temporarily restricted, or permanently restricted so gains may or may not be netted for presentation, and gains may or may not be reported net of expenses.
44
When should unconditional contributions be recognized as revenue?
Unconditional contributions, whether promised or received as cash, are recognized as revenue in the period received. Contributions revenue should be measured at fair value, not donor's book value. Donor intentions to give, rather than unconditional promises, are not considered revenue.
45
How should unconditional pledges received by a not for profit organization that will be collected over more than one year be reported?
Pledges Receivable, calculated at PV
46
Refundable Advance
Pledges or other assets recieved that are subject to conditions. once conditions have been met they are recognized as revenue
47
How is Treasury Stock Gain and Loss Reported?
It is not reported. APIC and Retained Earnings are affected by Treasury Stock transactions, not income.
48
How are Securities of a subsidiary that are convertible into parent company's stock treated?
Securities of a subsidiary that are convertible into parent company's common stock are potential common shares for diluted EPS.
49
Assumptions for related Party Transactions (2)
1. Transactions between related parties cannot be presumed to have been carried out on an arm's-length basis.
2. Representations about transactions between related parties should not imply that they are equivalent to arm's-length transactions unless such representations can be substantiated.
50
How are Voluntary changes in accounting principle recognized?
Retrospectively, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented
51
For non-monetary exchanges that have commercial substance how are gains and losses treated? Are there any exceptions?
Based on the FV's, thus recognizing gains and losses immediately.
Exceptions: (No gains or losses are recognized)
- Fair value is not determinable
- Exchange transaction to facilitate sales to customers
- Exchange transaction that lacks commercial substance
52
The Intrinsic Method
The intrinsic method is the excess of the market price over the exercise price.
53
At the time of death of an insured officer or employee,
| How is a gain recognized?
A gain would be recognized equal to the excess of the face amount of the policy over the cash surrender value at the time, as presented:
Cash XXX
Cash Surrender Value XXX
Gain from Proceeds of Life Insurance XXX
54
Which exchange rate is used for revenues, expenses, gains, and losses?
a weighted-average exchange rate for the period
55
Supplemental Disclosures for the Statement of Cash Flows
Must be disclosed regardless of indirect or direct method:
- Amount of income taxes paid during the year
- Amount of Interest paid during the period
56
Major Funds
Governmental fund and proprietary fund financial statements focus on major funds that should each be shown in a separate column. Nonmajor fund information can be combined into one column for presentation.
-Major Fund Requirements do not apply to the internal service fund
57
Temporary market declines expected to reverse are not recognized in interim financial statements. If the market decline did not reverse by year end is it recognized?
The decline should not be recognized until year-end. It is then recognized in the 4th Quarter.
58
The Government Wide Financial Statements do not report information in the _____ Funds.
The Fiduciary Funds (APIP):
- Agency
- Private Purpose
- Investment
- Pension
59
How are assets and liabilities valued in personal financial statements?
Assets - Estimated Current Values
| Liabilities - Estimated Current Amounts
60
Liquidation Preference of Preferred Stock in excess of Par - Recognition? Disclosure?
Disclose the liquidation preference in the equity section of the statement of financial position.
61
Composite Life System (Depreciation)
Composite life system is a depreciation method that applies a composite rate of depreciation to a heterogeneous group of assets, such as all the assets in a plant. The composite depreciation rate is based on a weighted-average of the various lives of the assets in the group. It is based on the total carrying amount of the group regardless of the age of each individual asset in the group. No gain or loss is recognized on the disposal or retirement of an individual asset in the group
The computation is composite depreciation expense = the composite depreciation rate × the group total carrying amount.
62
For Interim Financial Statements which tax rate do you use to calculate the estimated income tax expense?
The estimated effective tax rate for the year, ignore all other tax rates
63
Pensions: As prior year service cost is recognized as an expense, it is taken out of what?
Other Comprehensive Income
64
The funded status of a defined benefit pension plan for a company should be reported in the:
The over- or underfunded status of a defined benefit pension plan must be shown as an asset or a liability on the balance sheet, the statement of financial position. If plan assets exceed the projected benefit obligation, then the excess is a noncurrent asset; if plan assets are less, the deficiency is a current or noncurrent liability.
65
In a sale-leaseback transaction, a gain resulting from the sale should be deferred at the time of the sale-leaseback and subsequently amortized when:
I. the seller-lessee has transferred substantially all the risks of ownership.
II. the seller-lessee retains the right to substantially all of the remaining use of the property.
II. the seller-lessee retains the right to substantially all of the remaining use of the property.
66
Governmental - Securities Lending Transactions, the costs should be reported how?
The costs of securities lending transactions should be reported as expenditures or expenses in the operating statement.” They should not be netted with interest revenue or the income from the investment of any cash collateral
67
In accordance with FASB ASC 860-30, debtors sometimes grant a security interest in assets to secured party lenders. When this happens, the debtor should:
A. reclassify the asset(s) and report it separately on the balance sheet.
B. remove the asset(s) from the balance sheet.
C. report a loss equal to the carrying value of the pledged assets.
D. report the asset(s) as usual on the balance sheet.
FASB ASC 860-30-45-1 provides the following guidance:
A. reclassify the asset(s) and report it separately on the balance sheet.
68
How do you calculate the EFFECTIVE tax rate?
The first step is to know the taxable income. Net income for accounting purposes before tax would be the starting point. Adjust this number up or down for nontaxable or nondeductible items.
The municipal interest income would be nontaxable, so this would be subtracted from accounting income and the insurance premiums would be nondeductible (since they relate to nontaxed income) and would need to be added.
Thus, net income before taxes of $200,000 minus the municipal bond interest of $20,000, plus the insurance premiums $10,000 equals taxable income of $190,000:
$200,000 - $20,000 + $10,000 = $190,000
Taxable income times the tax rate equals tax due of $57,000:
$190,000 × 0.30 = $57,000
The effective tax rate would be the total tax due divided by the total income earned:
$57,000 ÷ $200,000 = 0.285 (28.5%)
69
How to calculate Book Value per share?
(Total Stockholder's Equity / Total Number of Shares Outstanding)
70
Large Stock Dividends are recorded at ___?
Par or Stated Value
| Large stock Dividends > 25%
71
When collectability is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as
APIC when the subscription is recorded
Cash (down payment) xxx
Subscriptions Rec. xxx
CS Subscribed xxx
APIC-CS xxx
72
The issuance of shares for legal services is recorded at ____.
The market value of the stock issued, it doesn't matter what the person usually charges.
CS ($5 Par value, but a $135 market rate, means a $130 APIC)
73
The MD&A is classified as what?
A component of Required Supplementary Information
74
Fund Accounting Types (2)
| Accounting Basis
Accrual Basis
| Modified Accrual Basis
75
Accrual Basis: Focus? Revenue Recognized?
Current Economic Resources Focus
| Revenues Recognized when Earned
76
Modified Accrual Basis: Focus? Revenue Recognized?
Current Financial Resources Focused
| Revenues Recognized when available and Measurable
77
Governmental: Opening Budgetary Journal Entry
Debit:Estimated Revenues Control
Credit: Appropriations Control
PLUG: Budgetary Fund Balance
78
PD-Consents-to-Smoking-Grass
Governmental Funds
- Uses Modified Accrual
- Current Financial Resources Focus
Revenue Recognized when available and Measurable
Permanent, Debt Service, Capital Projects, Special Revenue, General
79
The Combining Fund Statements are...
part of the comprehensive financial report but not part of the basic financial statements.
80
The statement of activities of the government-wide financial statements is designed primarily to provide information to assess which of the following?
Operational Accountability
81
The 3 Sections of a CAFR
Introductory, Financial, and Statistical
82
The MD&A should provide the user with
- an objective and easily readable analysis based on currently known facts, decisions, or conditions.
- a fact-based analysis providing positive and negative aspects of comparisons with prior years.
- information about the primary government and matters related to a component unit if deemed appropriate in the managers' professional judgment.
83
A component unit of the primary government may be...
- Governmental
- Not for Profit
- For Profit
84
Governmental Fund Balance Types (5)
| RACUN
Restricted - Restricted by contributor
Committed - Restricted by government
Assigned - Intended to be used for a purpose
Unassigned - Available to be spent
Non-spendable - Not in a "spendable" state (Inventory, prepaid expenses)
85
Fixed assets donated to a governmental unit should be recorded:
“Donated capital assets should be recorded at their estimated fair value at the time of acquisition plus ancillary charges, if any.”
86
CAFR: What's included in the introductory section?
- Table of Contents
- Letter of transmittal
- Other materials determined by management
87
Which characteristic of service efforts and accomplishments is the most difficult to report for a governmental entity?
Relevance and Understandability
88
The measurement focus of governmental-type funds is the determination of:
Both the changes in financial position (flow of resources) and financial position
89
The debt service fund of a governmental unit is used to account for the accumulation of resources for, and the payment of, principal, and interest in connection with:
General obligation long-term debt principal and interest.
Debt accounted for in a pension trust or a proprietary fund is serviced from that fund and is not general long-term debt.
90
For an imposed nonexchange form of tax, when are assets (cash or receivables) recognized?
For an imposed nonexchange form of tax, assets (cash or receivables) are recognized in the period when an enforceable legal claim has arisen, or when resources are received, whichever occurs first.
91
Do government-wide financial statements show individual funds or fund types?
No. The statements should be prepared using the accrual basis of accounting and distinguish between governmental and business-type activities. Information about fiduciary funds should not be included in the statements.
92
CAFR: What is included in the CAFR financial Section?
- Auditor's Report
- MD&A
- Basic Financial Statements
- Notes to the Financial Statements
- RSI other than MD&A
- Combining Statements: by fund type and/or fund category
- Schedules
93
BASIC FINANCIAL STATEMENTS: Goverment-wide FS
- Government wide statement of Net Position
| - Government wide statement of activites
94
BASIC FINANCIAL STATEMENTS: Government Funds FS
- Balance Sheet
| - Statement of Revenues, Expenditures, and changes in Fund Balance
95
BASIC FINANCIAL STATEMENTS: Proprietary Funds FS
- Statement of Net position
| - Statement of revenues, expenses, and changes in NEt position
96
BASIC FINANCIAL STATEMENTS: Fiduciary Fund FS
- Statement of Net Position
| - Statement of changes in Net Position
97
In preparing combined financial statements for a governmental entity, interfund receivables and payables should be:
reported as amounts due to and due from other funds.
98
What is included in the government-wide FS?
The government-wide financial statements report governmental activities, business-type activities, the primary government totals, and discretely presented component units. Fiduciary funds and fiduciary component units are not included in these statements.
99
What effect would the write-off of the receivables during the year ultimately have on equity?
(Think initial Journal entry)
Receivables usually are reported at the same time that revenue is recognized. For reporting purposes, revenues should be reduced by an appropriate allowance for amounts estimated to be uncollectible when revenue is recognized, thus affecting equity at time of recognition. To the extent of the allowance made ($50,000), the actual write-off of the receivable against the allowance would have no effect on equity.
100
How are narrative explanations of combining and individual fund statements presented?
On divider pages, directly on the statements or schedules, or in a separate section.
101
Which accounts close at the end of a fiscal year?
Non Permanent accounts (accounts that don't show up on the BS) Income statement accounts close, Expenditures
102
When are derived tax revenues recognized?
Revenues from derived tax revenues are recognized in the period when the underlying exchange has occurred (i.e., in the period the taxed sales transaction took place).
103
If determining the actual historical cost of general infrastructure assets is not practical because of inadequate records, public institutions that report as special-purpose governments either engaged only in governmental activities or engaged in both governmental and business-type activities should report major general infrastructure assets using:
If determining the actual historical cost of general infrastructure assets is not practical because of inadequate records, public institutions reporting as special-purpose governments should report the estimated historical cost for major general infrastructure assets.
104
Cash receipts from grants and subsidies to decrease operating deficits should be classified in which of the following sections of the statement of cash flows for governmental not-for-profit entities?
Noncapital financing
105
Tott City’s serial bonds are serviced through a debt service fund with cash provided by the general fund. In a debt service fund’s statements, how are cash receipts and cash payments reported?
cash receipts: Operating transfers;
| Cash payments: Expenditures
106
Governmental Fund Types?
Proprietary
Fiduciary
Governmental
107
Valuation Approaches
Market Approach - Price from similar transactions
Cost Approach (asset) - Price to replace similar asset
Income Approach - Converts future cash flows to current amounts
108
Statement of Net Position (Layout)
Assets (current and Non-current) - ordered by liquidity
Deferred Outflows of Resources - Future use of net assets (leaving)
Liabilities (Current and Non-current) - ordered by liquidity
Deferred inflows of resources - Future increase of net assets (entering)
109
Blue City's finance staff is analyzing expenses for presentation on the government-wide statement of activities. The City has some notes payable that clearly benefit specific governmental functions, but most of the city's long-term debt consists of general long-term liabilities. How should the interest on the debt be reported?
Interest that clearly derives from borrowing that is essential to support a program should be reported as a direct expense of that program, and interest that does not qualify as a direct expense should be reported as a separate line. The two types of interest should not be combined. Interest is reported as a component of other functions or a separate line, but not at the bottom of the statement. Although interest on long-term debt is usually an indirect expense, it should be reported as a separate line and not allocated.
110
How do you compute current year revenue?
Receipts current year
Add ending receivables
Less ending allowance for doubtful accounts
Less beginning receivables
Add beginning allowance for doubtful accounts
111
How are Infrastructure Fixed Assets accounted for?
The fund incurring the cost records an expenditure. The governmental unit can then record it in the general fixed assets account, but it is not required.
112
I-PIPE-A LOT
The Accrual Funds:
- Internal service
- Investment Trust
- Private Purpose Trust
- Enterprise
- Agency
113
How is interest expense treated for governmental funds?
Interest is not accrued, it is recorded as an expenditure when paid. If nothing is paid during the year, then nothing is recorded.
114
An acceptable method to present component units in a combined Financial Statements?
Most component units should be included in the financial Reporting Entity by discrete presentation
115
Net Income + OCI = ?
Comprehensive Income
116
Steps included in the SEC rule making process: (3)
Concept Release
Rule Proposal
Rule Adoption
117
Difference between combined Financial Statements and Consolidated Financial Statements?
The only difference in combined financial statements and consolidated statements is that a parent is not included in combined statements. Therefore, different fiscal periods, foreign operations, and noncontrolling interest are all treated in the same manner.
118
What items should be treated the in the same manner in both combined financial statements and consolidated statements?
Different fiscal periods, foreign operations, and noncontrolling interest
119
How can forfeited nonvested accounts of an employee benefit plan be used?
Required disclosure includes, among other items, the amount and disposition of forfeited nonvested accounts—specifically, identification of those amounts that are used to reduce future employer contributions, expenses, or reallocated to participant's accounts, in accordance with plan documents.
120
IFRS Revlaution model how are changes in FV treated? Gains/Losses?
- An increase is included in Asset revaluation surplus (an equity account)
- A Decrease, decreases operating income for the period
121
Not For Profit: Program and Support Services Expenses
Program Services: Costs incurred for carrying out it's primary mission
Support Services: Management and General, Fundraising
122
Financial statements shall include disclosures of material related party transactions, other than...?
- Compensation Arrangements
- Expense Allowances
- Other similar items in the ordinary course of business
123
Governmental - 6 expenditure Classifications
1. Fund
2. Function or Program
3. Organizational Unit (Department)
4. Activity
5. Character
6. Object (type of items/services purchased)
124
The diluting effect of options and warrants and their equivalents is reflected in diluted EPS by application of the treasury stock method, which assumes that:
A. proceeds from exercise are used to retire treasury stock.
B. proceeds from exercise are used to issue treasury stock.
C. proceeds from exercise are used to retire convertible debentures that were issued at par.
D. proceeds from exercise are used to purchase common stock at the average market price.
D. proceeds from exercise are used to purchase common stock at the average market price.
Exercise of options and warrants is assumed at the beginning of the period. Proceeds are assumed used to purchase common stock at the average market price during the period. The incremental shares are included in the denominator of diluted EPS.
125
Disclosures for if there was substantial doubt to continue as a going concern, but has been alleviated as a result of consideration of management’s plans.
- the principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans).
- management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
- management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations.
AUDITOR's OPINION IS NOT INCLUDED
126
Topic 275 of the FASB's Accounting Standards Codification is entitled “Risks and Uncertainties.” The types of risks and uncertainties discussed in the topic are:
- the nature of the entity's operations.
- the use of estimates in the preparation of the entity's financial statements.
- significant concentrations in certain aspects of the entity's operations.
127
A mandatorily redeemable financial instrument, such as mandatorily redeemable preferred stock, must be classified as a liability unless the redemption is required to occur only:
upon the liquidation or termination of the reporting entity.
128
Risk of Accounting Loss
the amount of write-off that a company would record if any party to an agreement failed to fully perform in accordance with the terms of the contract.
AR-AFDA = Risk of accounting loss
129
The price used to measure fair value should be adjusted for which transaction costs?
The costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market
130
An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception:
- embodies an obligation to repurchase the issuer's equity shares, or is indexed to such an obligation and
- requires or may require the issuer to settle the obligation by transferring assets.
131
When there is a change in the reporting entity, how should the change be reported in the financial statements?
With a change in reporting entity, all prior years' financial statements must be reported as if the change happened before the financial statements were presented. The cumulative effect of the change is an adjustment to beginning retained earnings for the first year presented. This treatment is the retrospective approach.
132
How should the acquirer recognize a bargain purchase in a business acquisition?
As a gain in earnings at the acquisition date
133
An entity is required to disclose:
A. a reconciliation of the numerators and denominators of the basic and diluted EPS computations.
B. the effect given to preferred dividends in income available to common shareholders.
C. securities that could be diluted in the future that were excluded from the current period's diluted EPS because they were not dilutive.
D. All of the answer choices are correct.
D. All of the answer choices are correct.
134
Under IFRS accounting for business combinations, how is goodwill and Bargain purchases treated?
IFRS differs from U.S. GAAP when accounting for a business combination. IFRS does not require goodwill to be recognized but allows it as an option. Under IFRS, a recognition of extraordinary gain as a “bargain purchase” is prohibited.
135
Any fair value measurement should assume that the transaction to sell the asset or transfer the liability occurs in which market?
The principal market for the asset or liability
| NOT THE ADVANTAGEOUS
136
For a correction of an error, IFRS requires that the following be disclosed:
- The nature of the error
- The correction to specific line items and earnings per share
- The amount of the correction at the beginning of the earliest period presented
137
The initial test in FASB ASC 360-10-35 for determining whether an impairment of the carrying amount of a long-lived asset is indicated is:
carrying amount exceeds undiscounted future cash flows.
138
In a business combination with goodwill recorded, how should any subsequent impairment of the goodwill be recognized on the income statement or statement of retained earnings?
As a loss from continuing operations
139
In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary's functional currency is the currency:
FASB ASC 830-10-45-2 states that the functional currency is the currency of the primary economic environment in which the entity operates or the currency in which most of the subsidiary's transactions are denominated.
140
Employee benefit plans and trusts must prepare two financial statements according to GAAP:
1. A statement of net assets available for benefits of the plan as of the end of the plan year
2. A statement of changes in net assets available for benefits of the plan for the year then ended
141
For the statement of cash flows which section of a capital lease payment included in the financing section?
Only the principal amount, the interest would be included in the operating section
142
Three acceptable basis' of accounting for reporting taxable income
1. Cash
2. Accrual
3. Hybrid
143
The primary characteristics of governmental structure are:
(1) The representative form of government and the separation of powers
(2) The federal system of government and the prevalence of intergovernmental revenues
(3) The relationship of taxpayers to services received
144
Permanent differences between taxable income and pre-tax accounting income affect:
A. interperiod income tax allocation.
B. intraperiod income tax allocation.
C. both interperiod and intraperiod income tax allocation.
D. neither interperiod nor intraperiod income tax allocation.
D. neither interperiod nor intraperiod income tax allocation.
The items referred to in this passage are commonly called permanent differences. A permanent difference affects only the current reconciliation of book income to taxable income, and the permanent difference has no effect on the computation of deferred taxes. Permanent differences do not affect either interperiod or intraperiod income tax allocation.
145
Pension Expense/Cost (A-SPIDER)
```
+Amortization of Net Obligation/Asset
+Service Cost
+Prior Service Cost
+Interest Cost
+Deferred Gain -Loss
-Excess Amortization of Deferred Gain +Loss
-Actual Return on Net Assets
```
146
Pensions: Project Benefit Obligation (PBO)
Reflects Future Compensation levels
147
Pensions: Accumulated Benefit Obligation
PV of Pension Benefits accrued based on PRESENT Compensation Levels
148
Pensions: Service Cost
+ to Pension Cost/Expense
| Increase in PBO for 1 year
149
Pensions: FV of Plan Assets (Over/Under funded, Gains/losses)
Overfunded = Non-current Asset
Underfunded = Non-current Liability
Gains/Losses go to OCI (Net of Tax)
150
Pension Disclosures
- Pension Funding Policies
- Types of assets held
- Next 5 years Benefits to be paid
- 5 Year Benefits in Aggregate thereafter
- Estimated Pension Contribution for next period
151
Pensions: Interest Cost
+Pension Cost/Expense
Change in PBO resulting from passage of time
Calculation = Beginning PBO * Discount Rate (Settlement Rate)
152
Pensions: Actual Return on Plan Assets
- to Pension Cost/Expense
Calculation = Ending PA - Beginning PA - Contribution Made + Benefits Paid
or
Beg FV of Plan Assets * Actual Rate
153
Pensions: Deferred Gain (Unrecognized Pension Gain/Loss)
+Gain -Loss
When actual investment results differ from long run expected returns
Calculation = Return on PA - Beginning PA * Expected Rate of Return
154
When are dividends recorded? Which date?
On the date of declaration
155
In accordance with FASB ASC 860-10, when a transfer of financial assets occurs and the transferor surrenders control over those financial assets, a sale is deemed to have occurred as long as the consideration received is not:
A. a long-term debt instrument of the transferee.
B. a beneficial interest in the transferred assets controlled by the transferor.
C. cash.
D. other stock held by transferee as an investment.
B. a beneficial interest in the transferred assets controlled by the transferor.
156
What are the measurement focus and basis of accounting for the government-wide financial statements?
Measurement focus: Economic resources
| Basis of accounting: Accrual
157
Is proceeds from sale of treasury stock a inflow or outflow on the statement of cash flows financing section?
It is an outflow
158
Cash receipts from grants and subsidies to decrease operating deficits should be classified in which of the following sections of the statement of cash flows for governmental not-for-profit entities?
Non-capital financing
159
What is a debenture bond?
A debenture bond is an unsecured note
160
Comprehensive Income Includes:
“the change in equity (net assets) of a business enterprise, during a period, from transactions and other events and circumstances from nonowner sources.” Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Dividends are a distribution to owners and would therefore not be included in comprehensive income.
161
Modified Cash Basis - Compared to Cash Basis? GAAP?
- Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP.
- The modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.
162
How would a municipality that uses modified accrual and encumbrance accounting record the condition of an excess of estimated inflows over estimated outflows?
A. Credit appropriations control
B. Credit budgetary fund balance
C. Debit appropriations control
D. Credit other financing sources
B. Credit budgetary fund balance
163
Over what period of time should leasehold improvements be amortized?
Over the shorter of the useful life of the improvement or the remaining lease term
164
Estimates are a necessary part of the preparation of financial statements. It is necessary to explicitly communicate to the users of the financial statements that estimates have been used and that many of the amounts reported are approximations rather than exact amounts. This understanding should help users to make better decisions. Disclosure of certain significant estimates must be made when which conditions are present?
BOTH MUST BE PRESENT:
- It is at least reasonably possible that the estimate of the effect on the financial statements will change in the near term due to one or more future confirming events.
- The effect of the change would be material.
165
Pensions: disclosures
- A description of the plan's key elements, such as investment policies
- Components of pension expense
- Reconciliation of projected benefit obligation and fair value of plan assets
- Funded status
- Rates used in measuring benefit amounts (discount, return on plan assets, compensation)
- Best estimates of next year's contributions to the plan
166
How do Not-for-Profits recognize expenses?
The same way as a business
167
Acid Test Ratio
Also known as the quick ratio
Total Cash + AR / Total Current Liabilities
168
A company using the composite depreciation method for its fleet of trucks, cars, and campers retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts would be decreased by the:
Cash Proceeds Recieved
169
A development-stage enterprise should use the same generally accepted accounting principles that apply to established operating enterprises for:
A. revenue recognition and deferral of expenses.
B. revenue recognition.
C. neither revenue recognition nor deferral of expenses.
D. deferral of expenses.
A. revenue recognition and deferral of expenses.
170
How to calculate impairment loss (using carrying amount and future cash flows)
If the carrying amount exceeds the future cash flows, an impairment loss should be recognized. The loss is the excess of the asset's carrying amount over its fair value.
171
Examples of significant estimates that can be found in the FS: (Disclosures)
- Inventory subject to rapid technological obsolescence
- Specialized equipment subject to technological obsolescence
- Environmental remediation-related obligations
- Contingent liabilities for obligations of other entities
- Amounts reported for long-term obligations, such as amounts reported for pension and postemployment benefits
- Estimated net proceeds recoverable, the provisions for expected loss to be incurred, or both, on disposition of a business or assets
172
The fair value for an asset or liability is measured as the:
price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.
173
mandatorily redeemable stock
The stock is classified as a liability.
Disclosure is required.
The stock is mandatorily redeemable financial instrument.
174
In accordance with FASB ASC 860-30, debtors sometimes grant a security interest in assets to secured party lenders. When this happens, the debtor should:
If the secured party (transferee) has the right by contract or custom to sell or repledge the collateral, then the obligor (transferor) shall reclassify that asset and report that asset in its statement of financial position separately (for example, as security pledged to creditors) from other assets not so encumbered.
175
An entity should recognize the fair value of an asset retirement obligation in the period:
in which the obligation is incurred if a reasonable estimate of fair value can be made.
176
XYZ Museum, a not-for-profit entity, received a very important painting three years ago as a donation to its permanent collection. At the time of receipt, the painting was appropriately valued. The museum does not capitalize its collections. Disclosure would be handled by:
A. disregarding the painting entirely because XYZ Museum opted not to capitalize.
B. including a line item on the face of the financial statement with disclosures regarding XYZ Museum's permanent art collection, which includes the painting.
C. including the value of the painting in the permanently restricted net assets total.
D. including the value of the painting in the unrestricted net assets total.
B. including a line item on the face of the financial statement with disclosures regarding XYZ Museum's permanent art collection, which includes the painting.
A not-for-profit entity may opt not to capitalize works of art, historical treasures, and the like as long as the items meet the definition of collection items: held for exhibition, protected, and preserved, with a policy that requires sales only for acquisition of other collection items. Capitalization means an addition to both sides of the accounting equation, assets and equities. If the collection is not capitalized, there is no amount included in equities or net assets. However, the existence of the collection, including the donated painting, cannot be disregarded and a note describing the collection must be referenced on a line on the face of the financial statement.
177
IAS 20 requires that revenue for a grant provided by a government entity be recognized when:
BOTH:
- there is reasonable assurance that the entity can comply with the conditions of the grant.
- when there is reasonable assurance that the grant will be received.
178
Under IFRS, which revenue recognition method should be used if the outcome of rendering services cannot reliably be estimated?
The same as GAAP, The Cost Recovery Method
179
IFRS: When a company has decided to discontinue operations of a component unit, the loss on disposal should...
Include operating losses of the current period
180
IFRS: Disclosure of the entity's financial instruments are required when...
When its practicable to estimate those values, or if the aggregated fair values are material to the entity
181
IFRS: Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if
An active market exists for the intangible asset
182
Under IFRS, for an intangible to be recognized it must:
- be probable that the expected future benefits that are attributable to the asset will flow to the entity; and
- The cost of the asset can be measured
- Be an identifiable intangible asset that lacks physical substance
183
IFRS allows an entity to recognize an intangible asset if it is an identifiable intangible that lacks physical substance. In order to be considered identifiable:
Either:
- Separable (it can be sold, transferred, licensed, exchanged or disposed of)
- Arises from contractual or legal rights
184
Under the revaluation model allowed under IFRS for the accounting for identifiable intangible assets:
Assets are periodically revalued and adjusted to their Fair Values and are amortized in between revaluation dates
185
IFRS - How is internally generated goodwill recognized
It cannot be capitalized
186
Under IFRS, what valuation methods are used for intangible assets?
The Cost Model or the Revaluation Model
187
IFRS: EPS
- Requires companies report both basic and diluted EPS.
| - Must show for continuing operations, but not for discontinued or extraordinary
188
IASB - Qualitative Characteristics of relevance
Roger is PC, but also materialistic
- Predictive Value
- Confirmatory value
- Materiality
189
IFRS: Presentation of FS (required and allowed)
Required:
-Comparative FS, presenting information from the prior year
-Assets/Liabilities distinguished between current and noncurrent or listed in order of liquidity
-Requires a separate statement of comprehensive income and statement of changes in equity
Allowed:
-Classification of expenses by nature or function
190
IFRS: Inventories (Required, Allowed, Not Allowed)
Required:
-Inventory reported at Lower of cost or net realizable value
-Items that are not interchangeable to be accounted for using specific identification
-All other items under FIFO or weighted Average
Allowed:
-Measurement under standard costing or the retail method if the amount approximates cost
-Recoveries of losses (reverse impairment)
Not Allowed:
-LIFO
191
IFRS: SoCF
| Required, Allowed
Required:
-Cash overdrafts as negative cash equivalents
Allowed:
-Direct, Indirect or the modifier indirect method (shows revenues and expenses in operating activities, and then reports the changes in working capital accounts)
-Interest and dividends RECEIVED as either operating or investing activities
-Interest and dividends PAID as either operating or financing activities
192
IFRS: Accounting changes/estimates/errors
- Change in Reporting Entity doesn't exist under IFRS
| - No other significant differences
193
IFRS: Construction Contracts (Revenue Recognition)
Required:
-Stage of completion (% of completion) accounting when the outcome can be reasonably estimated
-Zero Profit (Cost Recovery) accounting when the outcome cannot be reasonably estimated
Not Allowed:
-Completed Contract method
194
IFRS: Income Taxes
Required:
-Measuring DTA/DTL at the future tax rate that is enacted or substantially enacted as of the end of the period
-All DTA's and DTL's are noncurrent
Not Allowed:
-Recognition of deferred tax assets unless
195
IFRS: PP&E (Required)
Required:
Use of component depreciation with each significant cost depreciated separately (land and building, furniture, fixtures, equipment)
196
IFRS: Leases
Required:
Classification based on transfer of risks and rewards of ownership
- Finance Lease if transferred (Capital Lease under GAAP)
- Operating Lease if not transferred
Impairment loss may be recovered
To record as a finance lease, TT, BPO, "Major part" of life or PV equal to "substantially all" of FV
Initial direct costs are capitalized when a Finance Lease
197
IFRS: Provisions, Contingent liabilities and assets
Required:
Recognition of PROVISIONS when 3 conditions apply:
- Entity has present obligation resulting from a past event
- an outflow of resources will probably be required to settle the obligation
- the amount can be reliably estimated (measurable)
- else just disclose it
Not Allowed:
Recognition of contingent assets or liabilities
198
Non-monetary Asset Dividends (inventory) should be valued at
Fair Value as Dividend Revenue and Fair Value as employee compensatin expense
199
A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling (minority) interest balances in the parent company's consolidated balance sheet?
A. No effect on either retained earnings or noncontrolling interest
B. No effect on retained earnings and a decrease in noncontrolling interest
C. Decreases in both retained earnings and noncontrolling interest
D. A decrease in retained earnings and no effect on noncontrolling interest
B. No effect on retained earnings and a decrease in noncontrolling interest
The dividend will have no effect on consolidated retained earnings because consolidated retained earnings include only retained earnings of the parent company. However, since the noncontrolling (minority) interest (in this case, 30%) is a percentage of the stockholder equity (including retained earnings) of the subsidiary, any reduction in subsidiary retained earnings (such as dividend declaration) will decrease noncontrolling (minority) interest.
200
The price used to measure fair value should be adjusted for which transaction costs?
The costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market
201
Cash Flow Hedge Disclosures
- The net amount of gains or losses included in the cumulative translation adjustment during the reporting period
- A description of the transactions or other events that will result in the reclassification into earnings of gains and losses that are reported in accumulated other comprehensive income
- The estimated net amount of the existing gains or losses at the reporting date that is expected to be reclassified into earnings within the next 12 months
202
The diluting effect of options and warrants and their equivalents is reflected in diluted EPS by application of the treasury stock method, which assumes that:
proceeds from exercise are used to purchase common stock at the average market price.
Exercise of options and warrants is assumed at the beginning of the period. Proceeds are assumed used to purchase common stock at the average market price during the period. The incremental shares are included in the denominator of diluted EPS.
203
When should a lessor recognize in income a nonrefundable lease bonus paid by a lessee on signing an operating lease?
Over the life of the lease
204
Examples of nonrecognized subsequent events (Disclosed, but not accrued) (7)
1. Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued
2. A business combination that occurs after the balance sheet date but before financial statements are issued or are available to be issued
3. Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued
4. Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued
5. Losses on receivables resulting from conditions (such as a customer's major casualty) arising after the balance sheet date but before financial statements are issued or are available to be issued
6. Changes in the fair value of assets or liabilities (financial or nonfinancial) or foreign exchange rates after the balance sheet date but before financial statements are issued or are available to be issued
7. Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees after the balance sheet date but before financial statements are issued or are available to be issued.
205
In a sale-leaseback transaction, a gain resulting from the sale should be deferred at the time of the sale-leaseback and subsequently amortized when:
the seller-lessee retains the right to substantially all of the remaining use of the property.
if the lease meets one of the criteria for capital lease treatment (it does—the lease transfers title to the seller-lessee at end of lease term), then any gain on the sale should be deferred and amortized.
Again, the key element is the retention of the right to all remaining use of the property. Transfer of risks of ownership is not one of the four criteria for capital lease treatment.
206
FASB ASC 860 (Transfers and Servicing) provides for recognition of servicing assets and liabilities. These result when expected servicing income exceeds expected costs for assets or vice versa for liabilities. The resulting asset or liability should be amortized proportionally over:
the period of estimated servicing income or loss.
207
Net assets can be computed in either of two ways:
1. book values of stockholders' equity
| 2. book value of assets less book value of liabilities
208
A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?
A. Cumulative 8%, $50 par preferred stock
B. 10% convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock
C. 7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock
D. 6%, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock
C. 7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock
Dilutive securities reduce earnings per share. To determine dilution, a conversion basis must be stated. Each 7% $1,000 bond yields $49 ($70 - 30% tax) of earnings after tax. The conversion increases the number of shares by 40. The earning per share on the converted bonds is only $1.225 (49/40) thus diluting the basic earnings per share of $1.29.
209
Glade Co. leases computer equipment to customers under direct financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a 5-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?
323,400 / 4.312 = 75,000 Annual Lease Payment
75,000 * 5 Years = 375,000 Total Lease Amount collected
375,000 - 323,400 = 51,600 Interest Revenue Earned
210
Restorations of carrying value for long-lived assets are permitted if an asset's fair value increases subsequent to recording an impairment loss for which of the following?
A. Both held for use and held for disposal
B. Held for use
C. Held for disposal
D. Neither held for use nor held for disposal
C. Held for disposal
A long-lived asset classified as held for sale (disposal) must be measured at the lower of its carrying amount or fair value less cost to sell.
A loss should be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain should be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized for a write-down to fair value less cost to sell.
211
The FASB has jurisdiction over entities with which of the following characteristics?
Exempt from federal taxation
The joint FASB/GASB definition of governmental organizations that is included in several AICPA Audit and Accounting Guides, including State and Local Governments (paragraph 1.01), indicates that bodies corporate and politic and entities with the power to enact and enforce a tax levy are governments. Not-for-profit organizations that are not governmental are exempt from federal taxation.
212
The three classes of financial instruments that must be presented in the balance sheet as liabilities:
1. Mandatorily redeemable financial instruments
2. Obligations to repurchase the issuer's equity shares by transferring assets
3. Certain obligations to issue a variable number of shares
213
A change in accounting entity is reported how?
Retrospectively
214
If Company C is established for the merging of Company A and Company B, the business combination is classified as:
A. an acquisition of stock.
B. an acquisition of assets.
C. statutory merger.
D. statutory consolidation.
D. statutory consolidation.
The statutory consolidation classification refers to the merging of two enterprises into a newly established enterprise.
215
SubsequentEvents
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.
216
The FASB’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
- Level 1
- Level 2
- Level 3
Level 1 inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date
Level 2 inputs—inputs other than quoted prices included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly
Level 3 inputs—unobservable inputs for the asset or liability
217
How should gains or losses from fair value hedges be recognized?
The gain or loss, along with the offsetting loss or gain attributable to the hedged risk, should be recognized currently in earnings in the same accounting period.
The FASB requires that the following be recognized for fair value hedges:
- Changes in the fair value of the fair value hedge
- Changes in the fair value of the item being hedged
218
At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year-end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation?
Changes in the value of a liability for an asset retirement obligation must be measured by applying an interest method of allocation using a credit-adjusted, risk-free interest rate. Accretion expense would be:
$100,000 × 0.10 = $10,000
219
Acquisition Costs should be...
Expensed in the period incurred, they are not considered part of the acquisition cost
220
FASB ASC 270-10-45-1 concluded that interim financial reporting should be viewed primarily in which of the following ways?
A. As useful only if activity is spread evenly throughout the year
B. As if the interim period were an annual accounting period
C. As reporting for an integral part of an annual period
D. As reporting under a comprehensive basis of accounting other than GAAP
C. As reporting for an integral part of an annual period
The Financial Accounting Standards Board in FASB ASC 270-10-45-1 noted that “each interim period should be viewed primarily as an integral part of an annual period.”
221
opic 275 of the FASB's Accounting Standards Codification is entitled “Risks and Uncertainties.” The primary subject discussed in this topic is:
A. bankruptcy.
B. going concern.
C. disclosure.
D. All of the answer choices are discussed.
C. disclosure.
One of the purposes of financial statements is to provide information to help users predict the reporting entity's future cash flows and results of operations. This assessment depends, to some degree, on the users' knowledge and assessment of the risks and uncertainties involving the entity's operations. Disclosure of these risks and uncertainties is a critical component of the user's process of evaluating these variables. FASB ASC 275-10 addresses the disclosures required to facilitate a user's evaluation of an entity's risks and uncertainties.
222
A company that wishes to disclose information about the effect of changing prices should report this information in:
supplementary information to the financial statements.
A business entity that prepares its financial statements in U.S. dollars and in accordance with U.S. generally accepted accounting principles is encouraged, but not required, to disclose supplementary information on the effects of changing prices.
223
financial statements of a foreign subsidiary must be translated to U.S. dollars. What exchange rate is used?
The current Exchange Rate
224
How should a gain from the sale of used equipment for cash be reported in a statement of cash flows using the indirect method?
In operating activities as a deduction from income
225
Bonds sell at a premium when..?
| Bonds sell at a discount when..?
Bonds sell at a premium when the stated rate of interest paid by the bonds exceeds the market rate. The opposite is true if bonds sell at a discount.
Premium = Stated > Market
226
Gross Profit Recognized (Installment Sales)
Cash Collected * Gross Profit % = Profit Recognized (IS)
227
Deferred Gross Profit (Installment Sales)
Receivable Balance * Gross Profit % = Deferred Profit (BS)
Gross Profit = Sales - COGS
Gross Profit % = Gross Profit / Sales Price
228
Income recognized using the installment method of accounting generally equals cash collected multiplied by the
Gross Profit %
229
Drew Co. produces expensive equipment for sale on installment contracts. When there is doubt about eventual collectibility, the income recognition method least likely to overstate income is
The cost recovery Method
230
Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?
A. Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.
B. Good Neighbor Financing will assume the responsibility of collecting the receivables.
C. Milton will retain control of the receivables.
D. Good Neighbor Financing will take title to the receivables, and will return title to Milton after the loan is paid.
C. Milton will retain control of the receivables.
Under a pledge, an account receivable is used as collateral for a loan. Milton continues to collect the receivables and applies the collection to the loan balance.
231
During periods of inflation, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory valuation methods?
A. FIFO, Yes; LIFO, No
B. FIFO, Yes; LIFO, Yes
C. FIFO, No; LIFO, Yes
D. FIFO, No; LIFO, No
A. FIFO, Yes; LIFO, No
Under the FIFO inventory method, the ending inventory would consist of the last units purchased under both the perpetual and periodic inventory systems. Under the LIFO inventory method, the periodic inventory system would include in ending inventory the earliest units (beginning inventory and early purchases). Under LIFO, the perpetual inventory system would have expensed some of the beginning inventory and early purchases when sales were made early in the year.
232
IFRS - How are interest costs reported when purchasing PP&E with a loan?
The interest Costs are expensed immediately, they are not capitalized
233
Enterprises often carry life insurance policies on the lives of key officers and employees. If the enterprise is the beneficiary, the cash surrender value of the policy is an asset of the enterprise. The amount to be charged to expense is:
the amount of such premiums paid less the increase in cash surrender value during the period.
234
Trading Securities should be reported at ____ and holding gains/losses should be included in _____
Fair Value, earnings
235
Davis Tire Co. has a deferred compensation plan for several key employees. Each employee's plan contains an agreement not to compete and has a different set of benefits. How should Davis Co. account for this plan?
A. The plan should be accounted for as a pension plan or as a health and welfare plan.
B. The plan should be accounted for as a current expense and accrued liability each year of an employee's service life.
C. Deferred compensation plans do not need to be reported or disclosed.
D. A liability, not less than the sum of the nondiscounted future cash flows, should be reported.
B. The plan should be accounted for as a current expense and accrued liability each year of an employee's service life.
A deferred compensation plan which is not the equivalent of a pension plan should be reported in accordance with FASB ASC 710-10-25-11. Davis Co. would accrue a liability of not less than the present value of the estimated future payments.
236
On which date is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?
Date of grant
Both the intrinsic value method and the fair market value method use the grant date to measure the cost for stock issued to employees. At the grant date, one must compute a value for the shares used as compensation, which will be earned and taken as an expense over the service period.
237
For a defined benefit pension plan, the discount rate used to calculate the projected benefit obligation is determined by:
The discount rate for the projected benefit obligation is generally based on long-term debt interest rates. It has no direct relationship to the actual or the expected rate of return on plan assets.
238
Which of the following is a required financial statement for an investment trust fund?
A. Statement of revenues, expenditures, and changes in fiduciary net position
B. Statement of activities
C. Statement of revenues, expenses, and changes in fiduciary net position
D. Statement of changes in fiduciary net position
D. Statement of changes in fiduciary net position
Investment trust funds are one of the fiduciary fund types for state and local governments. Two financial statements are required for fiduciary funds—a statement of fiduciary net position and a statement of changes in fiduciary net position. (The statement of changes in fiduciary net position is not required for agency funds.)
239
For goods on consignment,are commissions included in COGS?
No, they are a selling expense not an inventory cost.
240
What is the purpose of reporting comprehensive income?
To summarize all changes in equity from nonowner sources
SFAC 6 defines comprehensive income as “the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.”
241
IFRS requires inventory to be reported at:
Lower of Cost or Net Realizable Value (LCNRV)
242
Common Stock Book Value per share
Total SHE / CS Outstanding
243
The term “tax position” as used in FASB ASC 740-10-20 refers to what?
A position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets. The term tax position also encompasses, but is not limited to:
1. A decision not to file a tax return
2. An allocation or a shift of income between jurisdictions
3. The characterization of income or a decision to exclude reporting taxable income in a tax return
4. A decision to classify a transaction, entity, or other position in a tax return as tax exempt
5. An entity's status, including its status as a pass-through entity or a tax-exempt not-for-profit entity.
244
A transaction that is unusual in nature or infrequent in occurrence should be reported as:
a component of income from continuing operations, but not net of applicable income taxes.
245
Assuming constant inventory quantities, which of the following inventory costing methods will produce a lower inventory turnover ratio in an inflationary economy?
FIFO (first in, first out)
In an inflationary period, rising prices will cause LIFO cost of goods sold to be highest (from recent purchases) and LIFO ending inventory to be lowest (earliest purchases). FIFO will give opposite results, with a lowest cost of goods sold (from earliest purchases) and highest ending inventory (from recent purchases). Average costing will be in the middle of the other two on both measures.
Inventory turnover is the division of cost of goods sold by average inventory.
Since FIFO gives the lowest cost of goods sold and a relatively high ending inventory amount going into the denominator average, FIFO will produce the lowest inventory turnover ratio.
Lower numerators and higher denominators yield lower ratios.
246
Rein, Inc., reported deferred tax assets and deferred tax liabilities at the end of the previous year and at the end of the current year. For the current year ended, Rein should report deferred income tax expense or benefit equal to the:
A. decrease in the deferred tax assets.
B. increase in the deferred tax liabilities.
C. sum of the net changes in deferred tax assets and deferred tax liabilities.
D. amount of the current tax liability plus the sum of the net changes in deferred tax assets and deferred tax liabilities.
C. sum of the net changes in deferred tax assets and deferred tax liabilities.
The basic way that income tax expense is computed is to compute the correct measured values of the deferred tax assets and deferred tax liabilities at the end of the period. When the journal entry is prepared to pay the current income tax due, the necessary adjustments are made to the balances in the accounts of the deferred tax assets and deferred tax liabilities, and the income tax expense is the amount needed to balance that journal entry.
Thus, the income tax expense is basically the sum of the changes in those deferred tax asset and liabilities accounts.
247
Disclosure of information about significant concentrations of credit risk is required for:
A. all financial instruments.
B. financial instruments with off-balance-sheet credit risk only.
C. financial instruments with off-balance-sheet market risk only.
D. financial instruments with off-balance-sheet risk of accounting loss only.
A. all financial instruments.
An entity shall disclose all significant concentrations of credit risk arising from all financial instruments, whether from an individual counterparty or groups of counterparties. An entity must also recognize all of its derivatives as an asset or liability.
248
For the purpose of determining that no additional segments should be reported, the total of external revenues of all reportable segments must make up at least what percentage of total consolidated revenues?
75%
249
When a full set of general purpose financial statements are presented, comprehensive income and its components should:
be displayed in a financial statement that has the same prominence as other financial statements.
250
The times preferred dividend earned ratio
Net Income / Total Preferred Stock dividends
251
A Liquidating Dividend, how is it recorded?
is not income, but a return on investment
252
How is the prepayment of last month's rent recognized in a lease? Is it capitalized?
The rent is capitalized as prepaid rent and not capitalized over the life of the lease. It is expensed in the last month of the lease term.
253
assets conveyed in a troubled debt restructuring should be valued at their
Fair Value
254
Able Co. provides an incentive compensation plan under which its president receives a bonus equal to 10% of the corporation’s income before income tax but after deduction of the bonus. If the tax rate is 40% and net income after bonus and income tax was $360,000, what was the amount of the bonus?
A. $36,000
B. $60,000
C. $66,000
D. $90,000
B. $60,000
To solve this problem, work backwards. If net income after the bonus and the taxes was $360,000, then (taking the tax expense back first) income before taxes was $600,000 (using the after-tax back to pre-tax conversion formula, $360,000 ÷ 0.6 = $600,000, 0.6 = 1 less the tax rate of 40%). Now, the bonus is equal to 10% of the income after deducting the bonus, which would be the income before taxes of $600,000. Thus the bonus is 0.10 × $600,000, or $60,000.
255
When should an anticipated loss on a long-term contract be recognized under the percentage-of-completion method and the completed-contract method, respectively?
Under the percentage-of-completion method, gains are recognized on profitable long-term contracts as the work is progressing, and under the completed-contract method, all gains are deferred and recognized when the contract is complete. However, both methods are alike in recognizing estimated ultimate losses on a losing contract immediately.
256
Receivables Turnover Ratio
Net Credit Sales / Average AR (Net)
257
If a temporary difference results in additional taxes being paid then it is a ...
liability
258
The lower of cost or market rule for inventories may be applied to total inventory, to groups of similar items, or to each item. Which application generally results in the lowest inventory amount?
A. All applications result in the same amount.
B. Total inventory
C. Groups of similar items
D. Separately to each item
D. Separately to each item
259
Which of the following statements regarding inventory accounting systems is true?
A. A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts.
B. A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
C. An advantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively simple.
D. An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance.
B. A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
The periodic inventory system calculates cost of goods sold as the difference between cost of goods available for sale and ending inventory. This system does not maintain records indicating what the amount of ending inventory should be. It simply requires a company to determine what the amount of ending inventory is at period end. Therefore, there is no way to determine what portion of the items represented by the difference between cost of goods available for sale and cost of ending inventory was sold and what portion was stolen, broken and discarded, etc. In short, this system assigns the entire difference to cost of goods sold because of the inability to determine what portion represents inventory shortages.
260
Which statements are usually included in a set of personal financial statements?
A statement of financial condition and a statement of changes in net worth
261
An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund:
1. increases by revenue earned on the investments.
2. is not affected by revenue earned on the investments.
3. decreases when the investments are purchase
1. increases by revenue earned on the investments.
Sinking funds are special-purpose investments, in the form of cash and/or securities. Sinking funds are increased by revenues earned and by additional investment.
262
For a correction of an error, IFRS requires that the following be disclosed:
1. The nature of the error
2. The correction to specific line items and earnings per share
3. The amount of the correction at the beginning of the earliest period presented
There is no requirement to describe how the error will be prevented in the future.
263
Which of the following is used in calculating the income recognized in the fourth and final year of a contract accounted for by the percentage-of-completion method?
A. Actual total costs
B. Income previously recognized
C. Both actual total costs and income previously recognized
D. Neither actual total costs nor income previously recognized
C. Both actual total costs and income previously recognized
264
Which of the following must be done when an entity is required to use the liquidation basis of accounting?
A. Measure assets at fair value
B. Recognize previously unrecognized items that the entity expects to sell
C. Recognize costs and income expected to be incurred or earned through liquidation only after the liquidation is complete
D. Recognize the costs of liquidation only after the liquidation is complete
B. Recognize previously unrecognized items that the entity expects to sell
"Recognize previously unrecognized items that the entity expects to sell" is correct. Assets must be measured at the estimated amount of cash expected to be collected. Costs and income should be recognized when it becomes apparent that liquidation is imminent.
265
An increase in the cash surrender value of a life insurance policy owned by a company would be recorded by:
A. decreasing annual insurance expense.
B. increasing investment income.
C. recording a memorandum entry only.
D. decreasing a deferred charge.
A. decreasing annual insurance expense.
Debit: Insurance Expense
Credit: Cash
266
For a defined benefit postretirement plan, an employer recognizes a transition obligation or transition asset, determined as the measurement date for the beginning of the fiscal year in which GAAP employers’ accounting for postretirement benefits other than pensions is applied. The transition obligation or transition asset may be recognized:
A. immediately in net income of the period of change as the effect of a change in accounting principle and on a delayed basis as a component of net periodic postretirement benefit cost.
B. immediately in net income of the period of change as the effect of a change in accounting principle.
C. on a delayed basis as a component of net periodic postretirement benefit cost.
D. neither immediately in net income of the period of change as the effect of a change in accounting principle nor on a delayed basis as a component of net periodic postretirement benefit cost.
A. immediately in net income of the period of change as the effect of a change in accounting principle and on a delayed basis as a component of net periodic postretirement benefit cost.
267
Qualifying Assets
assets that are constructed or otherwise produced for an entity's own use (including assets constructed or produced for the entity by others for which deposits or progress payments have been made).
The interest is CAPITALIZED not expensed
268
Inventory Turn Over Ratio
COGS / Average Inventory
269
When does the Attribution period begin and end?
Begins at the employee's date of hire and ends at the full eligibility date
