CPA FAR Becker Wk 2

Question 1

revenue recognition “rev rec”

Answer 1

revenue is recognized when the entity satisfies the performance obligation such as transferring a good or service to the customer

recognized at amount that reflects the expected consideration the entity is entitled to receive in change for the good or service

all entities. public or private, that enter into contracts with customers are subject to rev rec standard

Question 2

Rev Rec in 5 steps

Answer 2

1. ID contract with customer
2. ID separate performance obligations
3. determine transaction price
4. allocate transaction price to separate performance obligations
5. recognize revenue when the entity has satisfied the performance obligations

Question 3

ID contract with customer

Answer 3

Contract= agreement 2+ parties that creates enforceable rights and obligations and it can be written, verbal or implied

customer= party that has contracted with an entity to exchange consideration in order to obtain goods and services that are an output of an entity’s ordinary activities

Question 4

ID contract with customer: criteria

Answer 4

all parties have approved contract and have committed to perform their obligations
rights of each party are ID’d
payment terms ID’d
contract has commercial substance = FCF (amount, risk, timing) and are expected to change as result of the contract
probable to collect substantially all due consideration under the contract

Question 5

ID separate performance obligations

Answer 5

performance obligation= promise to transfer a good or service to a customer

transfer= either individual good or service or a series of goods and services (substantially the same; delivered in same manner)

if the promise to transfer a good or service is NOT distinct from other goods or services, they will all be combined into a single performance obligation

Question 6

ID separate performance obligations= to be distinct

Answer 6

to be distinct, just meet both criteria
1. promise to transfer the good and service is separately ID from other goods and services in the contract
2. customer can benefit either from the good or service independently or when combined with the customer’s available resources

Question 7

determine transaction price

Answer 7

amount of consideration that an entity can expect to be entitled to receive in exchange for transferring promised goods or services to a customer

should be determined considering effects of:
variable consideration (any constraining estimates)
significant financing
noncash considerations
any consideration payable to the customer

Question 8

determine transaction price: variable consideration

Answer 8

amount of variable consideration should be estimated by:
taking range of poss amounts
using either expected value (sums probability weighted amt) or most likely amount = whichever is assumed to be a better predictor
should only be included in the price if it is probable that a significant revenue reversal will not be required once any uncertainty tied to the consideration is resolved

Question 9

determine transaction price: significant financing

Answer 9

TVM should be an adjustment to transaction price if timing of payments per contract provides either the customer or the entity significant benefit in regard to financing the transfer of goods or services
rev rec= price that would have been paid in cash by the customer at the time of transfer
if the time between the transfer of goods and services and the payment by the customer is anticipated to be less than one year = discounting transaction price is unnecessary

Question 10

allocate transaction price to performance obligation

Answer 10

if there is more than one performance obligation in the contract, the transaction price should be allocated to each separate performance obligation based on the amount of consideration thta would be expected for satisfying each unique obligation.
stand alone selling price (and any discount/variable consideration) of each distinct good or service underlying each performance obligation should be determined at contract inception

Question 11

allocate transaction price to performance obligation: stand alone selling price

Answer 11

price an entity would sell the promised good or service to a customer on a stand alone basis
once price is determined for each obligation in the contract, the total transaction price should be allocated in proportion to the stand alone selling price

Question 12

allocate transaction price to performance obligation: discounts

Answer 12

exist when the sum of the stand alone prices for each obligation within a contract exceeds the total consideration for the contract

should be allocated proportionally to all obligations within the contract

Question 13

recognize revenue when entity satisfies the performance obligation

Answer 13

entity should recognize revenue when entity satisfies the performance obligation by transferring the good or service to the customer who obtains control of the asset

control= obtain benefits from, direct usage of the asset, while preventing other entities from obtaining benefits and directing usage

satisfies the performance obligation= over time or point in time

Question 14

recognize revenue when entity satisfies the performance obligation: satisfied over time

Answer 14

satisfied over time = must be able to reasonably measure progress towards completion (input or output methods)
Ex
annual service contract
subscription service
not basic inventory

Question 15

recognize revenue when entity satisfies the performance obligation: satisfied over time; Output methods

Answer 15

output methods-
revenue is recognized based on value to customer: goods transferred relative to remaining goods/services promised
Ex
units produced, delivered
time elapsed
milestones achieved
surveys of performance completed to date
appraisals of results achieved

output methods should only be chosen when output selected represents the entity’s performance toward complete satisfaction of the performance obligation

if outputs not available or directly observable, use input method

Question 16

recognize revenue when entity satisfies the performance obligation: satisfied over time; Input methods

Answer 16

input methods-
revenue is recognized based on the entity’s efforts or inputs to satisfy the perf obligation relative to total expected inputs
Ex
cost incurred vs total expected costs
resources consumed
labor hours expended
time elapsed
disadvantage: is there a direct relationship inputs and transfer goods/services?
If inputs used evenly during perf period= recognize on a straight line basis

Question 17

recognize revenue when entity satisfies the performance obligation: satisfied at a point in time

Answer 17

satisfied at a point in time
recognize at the point in time when the customer obtains control of the asset

Question 18

changes in accounting estimate

Answer 18

1. not an error
2. prospective = DO NOT restate
3. changes made current period and moving forward

Question 19

changes in accounting estimate: prospective

Answer 19

using new info in current and future years
do not restate previous periods
no impact on prior retained earnings

Question 20

changes in accounting estimate: examples

Answer 20

change in life of fixed asset
change accrual officers’ salaries or bonuses
write down of obsolete inventory
economic conditions
product demand chg
settlement of litigation
change in acctg estimate that is inseparable: depreciation method or change TO LIFO
revision of estimates disc ops

Question 21

changes in accounting principle: retrospective

Answer 21

generally, changes in accounting principle requires retrospective approach (with some exceptions)

*always adjust beginning retained earnings net of tax
=adjustment * (1-tax rate)

Question 22

What are changes in accounting principle: retrospective

Answer 22

going from one acceptable GAAP method to another acceptable GAAP method is change acctg principle

*going from non-GAAP to GAAP= error correction (this is different)

need to justify change

Question 23

changes in accounting principle: rule of preferability

Answer 23

cannot change accounting principles without justification

may only change if: required by GAAP or the new method is PREFERRED and presents the info more FAIRLY

Question 24

changes in accounting principle: Exceptions are treated differently

Answer 24

Exception:
change TO LIFO
change in method of depreciation

these are inseparable from change in accounting estimates so they are treated as estimate changes = prospectively

Question 25

General rule: retrospective approach for these changes

Answer 25

adjust beginning retained earnings, net of tax
change in accounting entity = entity has changed composition
change in accounting principle
error corrections

Question 26

change in accounting entity

Answer 26

entity has changed composition:
mergers
acquisitions
divestitures
most common: parent buys subsidiary
retrospective application

Question 27

Restatement: comparative financial statements

Answer 27

restate old financials and current year to be comparable for all years presented
reflects info for new reporting entity

Question 28

Error correction: prior period adjustment

Answer 28

restatement required
comparative fin stmt= adjust beg RE for year of error or earliest year presented if not including year of error
if not comparative= adjust beg RE
error corrections= Not accounting changes
Ex
correction of error in recognition
error in measurement
error in presentation
error in disclosure
math errors
change from non-GAAP to GAAP (cash to accrual)
mistakes application of GAAP
oversight or misuse of facts that existed at the time of fin stmt prep

Question 29

Adjusting entries: matching principle

Answer 29

GAAP= revenue and expense matched to period earned and incurred
accrual basis of acctg = records rev and exp without exchange of cash
GAAP= it is sometimes necessary to defer or accrue rev and exp to match with appropr period

Question 30

Error correction: capitalized

Answer 30

Should have been capitalized:
in some instances, an entity recorded as rev or exp when it should have been an asset or liability such as prepaid expense or unearned revenue = needs adjusting entry to match the rev and exp to the correct period

Question 31

Adjusting journal entries

Answer 31

never involve the cash account
hit one I/S and one B/S account
needs to be recorded before end of year to correct financials

Question 32

direct write off

Answer 32

not GAAP compliant
used for tax purposes

Question 33

allowance method for write off = GAAP compliant

Answer 33

DR allowance for uncollectible
CR bad debt exp

Question 34

FOB shipping - accrual

Answer 34

if the item is in transit and it is FOB Shipping, need to recognize expense on the buyer side

Question 35

AFS securities = values FMV

Answer 35

available for sale securities must be valued on B/S at fair value which can increase the value of the investment on B/S (or lower)= unrealized gain or loss.

Gain adjustment:
DR valuation acct (FMV adjustment)
CR unrealized gain for AFS securities

OCI = gains and losses not yet realized = do not impact net income/not recog on I/S

Question 36

OCI vs AOCI

Answer 36

OCI = current year gains and losses not recognized on the I/S (unrealized) per GAAP.
OCI gains and losses = unrealized gains and losses will impact financials in the future (no I/S impact yet), but they are recorded B/S equity section. once realized= impacts I/S.

AOCI = accumulated OCI stated at a point in time. it accumulates all historical gains and losses recorded from OCI/records on the balance sheet in the equity section

at year end, OCI closed out to AOCI

Question 37

expensed incorrected, should have been capitalized (expensed across useful life of the asset)

Answer 37

incorrect:
DR Expense (full amount)
CR cash
correction:
DR Prepaid expense
CR expense
adjusting at incurred:
DR expense
CR prepaid expense

Question 38

footnote disclosures

Answer 38

required by GAAP for users to be able to better understand the financials with context and important information

Question 40

summary of significant accounting policies

Answer 40

important disclosures such as measurement bases in financials and specific accounting principles and methods used during the period
Ex
depreciation methods
amortization of intangibles
inventory valuation methods
use of estimates
fiscal year defined
special rev rec issues

Question 41

remaining notes to financials

Answer 41

contains all other relevant info to decision makers that is not presented in the body of the financial statements or summary of significant accounting policies
Ex
material info and details about specific assets and liabilities
nature of changes in SE
info about mkt sec disclosure
fair value estimates (what is the basis? how did you calc?)
info contingency losses/gains, commitments and contractual obligations (lawsuits)
descriptions related to pension plans
segment disclosures dealing with subsequent events
info related to changes acctg principles or implementation of new standards

Question 42

disclosures of risks and uncertainties

Answer 42

FASB= gives fin stmt users the lens thru which leadership views financials
risk and uncertainties for major ops, products, geographic locations
relative importance of each biz if entity operates mult biz (biggest piece, importance to overall strategy)
use of accounting estimates (judgments, assertions) in prep of fin stmt

Question 43

certain significant estimates (sensitive to change)

Answer 43

deferred tax asset allowances= will you be able to realize them?
inventory or equipment subject to rapid tech obsolescence
capitalized computer software costs
loan valuation allowances
amounts reported LT obligations and LT contracts
litigation related obligations- contingent liabilities
gives reader- Why? How?

Question 44

concentration risk and vulnerability

Answer 44

requires disclosure
concentration in volume of biz related to particular customer, supplier, lender, contributor
concentration in rev related to certain products, services, fundraising events
concentration in avail supply of materials
concentrations in market or geographic area
increased concentration = increased risk

Question 45

subsequent event

Answer 45

occurs after B/S date but before issuance/avail to be issued - financial statement
between Y/E and end of audit
recognized or unrecognized subsequent events

Question 46

Type 1 subsequent event

Answer 46

*recognized
it affects something already on B/S or in financial statements
it provides additional info about conditions that existed as of B/S date
it MUST be recognized (in some form) and adjusted on financial statements (footnote or adjusted)

Question 47

Type 2 subsequent event

Answer 47

not recognized = no adjustment required = poss disclosure
did not exist at B/S date
should disclose is omission would be misleading in the financial statement

Question 48

sequence of subsequent events

Answer 48

financial statements are available (prepped and ready)
financial statements are issued (widely distributed to users)

public company = longer time period to eval subsequent events after declaration of fin stmt
private company= stop eval once org declares fin stmt avail to be issued

Question 49

Reissuance of financial statements

Answer 49

entity should not recognize events that occurred between the date of orig issuance/avail to be issued and date reissued unless adjustment is required by GAAP or other regulatory requirements

Question 50

Revised financial statements

Answer 50

revised to correct an error or retrospective GAAP tx
revised fin stmt = considered reissued
disclosure is not required for SEC filers
if not SEC filer, entity shoudl disclose in both issued/avail to be issued and reissued versions