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CPA FAR Exam > CPA FAR Ch 1 > Flashcards

CPA FAR Ch 1 Flashcards

1
Q

Adjusting entry: PPE

A

depreciation:
DR Deprec exp
CR Accum depreciation (contra asset)

NBV: Equipment less Accum Deprec = NBV

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2
Q

Adjusting entry: Unearned revenue (deferral)

A

Deferral= cash now, I/S later
revenue not yet earned = prepaid = liability
Once earned: recognize the revenue
DR unearned revenue
CR revenue

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3
Q

Accrual for revenue

A

earned revenue, not yet recorded = otherwise revenue is understated
DR AR
CR revenue

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4
Q

Adjusting Entry: prepaid expense (deferral)

A

cash now, I/S later
prepaid= expense not yet incurred
adjust when incurred
DR Expense
CR prepaid exp/asset
without adjustment = expense understated

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5
Q

AOCI
accumulated other comprehensive income

A

B/S= AOCI part of equity
OCI-> direct to equity-> reclass-> I/S->RE->Equity
change AOCI =gain or loss or reclass adjustment
change AOCI= disclose face or notes of financial statements
Beg AOCI
+/- OCI/PUFI
+/- reclass =
End AOCI

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6
Q

reclassification adjustment

A

avoids double counting
moves OCI items from AOCI -> I/S
reverse gain = subtract
reverse loss = add back
OCI-> direct to equity-> reclass-> I/S ->RE -> Equity

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7
Q

Equity

A

paid in capital less treasury stock
earned capital (retained earnings)
ending AOCI

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8
Q

statement of Comprehensive income- single statement approach

A

revenue-> net income +/- OCI/PUFI (net of tax) = CI
CI= not reported on a per share basis
start with revenue

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9
Q

statement of Comprehensive income- 2 statement

A
  1. income statement: Rev -> Net income
  2. Net income
    +/- OCI PUFI = CI (net of tax!)

CI not reported on a per share basis
starts with net income

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10
Q

Items reported net of tax

A

discontinued operations
PUFI/OCI
Comprehensive income

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11
Q

Balance sheet: AOCI

A

accumulated other comprehensive income
it is cumulative
Beg AOCI
+/- OCi/PUFI
+/- reclass
=End balance AOCI

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12
Q

Income statement: Net income or loss

A

Multistep:
Operating income (core biz)
nonoperating income (other income)
income from cont ops
income tax expense
income from cont ops after tax
+/- disc ops (net of tax)
=Net income or loss

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13
Q

Income from continuing operations

A

operating income (core business) + nonoperating income

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14
Q

other comprehensive income OCI

A

= PUFI
direct tp equity
reported net of tax
pension adjustment
unrealized gains or losses AFS securities and hedges
foreign currency items (translation)
instrument specific credit risk
OCI is not the same as CI

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15
Q

comprehensive income CI

A

net income and OCI = CI
a change in equity (net assets) of a business during the period from transactions and other events from nonowner sources
change in the period except from owner investment and distribution to owners

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16
Q

Income statement

A

REGL-> Net income -> RE -> Equity
REGL = revenue, expenses, gains, and losses
*there are a few gains and losses that are direct to equity- PUFI - and not in I/S

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17
Q

currency exchange rate or spot rate

A

exchange rate at the current date or for immediate delivery of currency

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18
Q

currency exchange methods

A

direct = domestic currency in numerator
EX $1.47 USD/1 euro
indirect = foreign currency in numerator
EX 1.01 euro/$1 USD

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19
Q

loss on disposal or gain on disposal

A

sales price less carrying value = loss or gain on disposal

disc ops reported net of tax

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20
Q

Discontinued operations: gain or loss reported net of tax

A

gain or loss * (1-tax rate)

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21
Q

if held for sale= when is start date for reporting on the income statement?

A

fiscal year typically
Jan 1 - Dec 31 of year held for sale even if board decides after Jan 1
all revenue/exp/gain/loss reported as disc ops on I/S (net of tax)

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22
Q

what if written down year 1 disc ops and the fair value increases year 2?

A

reverse impairment = can only write up to the amount written down previously = the amount is capped

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23
Q

rule of conservatism

A

cannot sit on unrealized LOSS = write down unrealized loss immediately
not this for disc ops

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24
Q

I/S: operating income

A

revenue, expenses, gains and losses from core business operations
EX COGS, SG&A, Depreciation, R&D

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25
Q

Continuing operations =

A

operating income/loss + nonoperating income/loss

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26
Q

nonoperating income or loss

A

revenue, expenses, gains and loss from NONcore business operations (incidental and peripheral)
these are unsual and infrequent and may not occur again
if not a bank = add interest income and expense here
EX sell off noninventory items like PPE or investments

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27
Q

categorize as discontinued operations

A

a major segment of the business is being sold or disposed of such as a product line or a geographic area - must be s strategic shift
the board must of this and categorize as held for sale = move to disc ops
reported at bottom of income statement NET OF TAX
must disclose details in footnotes of the financial statements

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28
Q

disc ops- how is held for sale reported on the balance sheet

A

reported lower of NRV or book value

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29
Q

NRV net realizable value

A

FMV less cost to sell
important for disc ops

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30
Q

depreciation or amortization of assets (disc ops)

A

stops when held for sale for disc ops

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31
Q

impairment loss (disc ops)

A

NRV less book value

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32
Q

earnings before tax

A

total revenues and gains
less total expenses and losses
**except tax expense

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33
Q

accounting for freight

A

freight in= COGS/material cost (capitalize/inventory)
freight out = selling expense

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34
Q

general and administrative expenses

A

officer’s salary
accounting fees
legal fees
insurance expense

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35
Q

effective tax rate

A

tax expenses/income before taxes

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36
Q

profit margin

A

net income/net sales

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37
Q

nonoperating revenue and expenses example

A

interest income and interest expense unless you are a bank

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38
Q

operating margin

A

operating income/net sales

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39
Q

selling expenses

A

freight out
sales salary
sales commissions
advertising

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40
Q

net sales

A

gross sales less returns and discounts

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41
Q

total sales

A

net sales + service sales/revenue + rental revenue

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42
Q

cost of sales

A

COGS + cost of services sold + cost of rental income

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43
Q

gross profit

A

total sales less total cost of sales

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44
Q

sales less COGS=

A

gross profit

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45
Q

income from continued operations

A

operating income + nonoperating income

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46
Q

discontinued operations reported

A

Net of tax

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47
Q

solvency ratio to evaluate long term financial risk

A

debt/equity = D/E ratio

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48
Q

liquidity ratio to measure short term risk of distress

A

CA/CL
current assets/current liabilities

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49
Q

first claim on assets

A

liabilities then preferred stock

50
Q

noncurrent assets

A

not directly used in operations except PPE
Ex investments
funds
stock or bonds in other companies
real estate from non core business

51
Q

capital structure

A

combo of debt and equity to finance assets and operations

52
Q

balance sheet

A

statement of financial position
measures ST and LT risk as well as growth potential and capacity

53
Q

stock buy backs

A

concentrate EPS stock buy backs = treasury stock = contra equity
could be a sign of optimism

54
Q

asset

A

probable future economic benefit
likely to generate revenue in the future

55
Q

income statement

A

statement of earnings
looks at profitability
evaluates performance risk and operating risk
can revenues generate a profit?

56
Q

comprehensive income

A

net income + OCI = CI

57
Q

assets are valued at ___

A

historical value not fair market value

58
Q

statement of cash flows

A

why did cash exchange?
dictated value objectively
assesses quality of earnings and growth potential

59
Q

intangibles

A

reported at book value
FMV could be much higher
EX patent, copyright, franchise, trademark, goodwill

60
Q

liabilities

A

first claim on assets
will have maturity date
debt matures and equity does not mature
probable future sacrifice

61
Q

equity

A

net assets = residual interest = equity
second claim on assets after liabilities
increases in equity = dilute EPS
equity does not mature (debt does mature)

62
Q

cost

A

amount actually paid for something, an expenditure
amount measured in money that is expensed for items like capital assets, services, payroll, and merchandise received
cost IS NOT synonymous with expense
cost = generally a one time payment, price paid to acquire an asset
expense is described as amount paid regularly towards ongoing business operations (consumption of the item acquired)
EX cost of an asset = PPE
expense of PPE = depreciation expense

63
Q

gain

A

recording of an asset not acquired in the ordinary course of business and without an incurrence of an expense
reported at net amount (proceeds less book value)

64
Q

unexpired costs

A

prepaids= expensed in future periods
EX asset like prepaid expense, inventory, NBV fixed asset, unexpired cost of patent
cost will expire in future periods (charge against revenue in future periods)

65
Q

capitalized costs are booked __

A

as an asset as they help generate revenue in future periods

66
Q

period costs

A

are expensed immediately

67
Q

revenue

A

reported at gross amount of consideration to which the entity expects to be entitled in exchange for specified goods and services transferred

68
Q

supplies expense impact on net income

A

Beg balance inventory supplies
+ purchase of supplies
=available for sale supplies
less end supplies balance
=supplies expense

expense in period incurred otherwise expense is understated and net income is overstated

69
Q

Research resources for CPA Exam

A

authoritative literature
Tax code -> IRS code
financial statements -> FASB codification
Audit-> AICPA
Ethics and prof standards -> AICPA

70
Q

Cost of PPE

A

purchase price +
add sales tax
add shipping costs
add installation costs
= equipment cost/PPE

*do not include personnel training as it gets the employee ready not the equipment

71
Q

to enter a journal entry for depreciation must know salvage value, cost of asset and its useful life

A

use straight line or DDB or other?
DR Depreciation expense
CR Accumulated depreciation (contra asset)

this expenses the asset across its useful life

72
Q

if billing > CIP (construction in progress)

A

= current liability (negative value)
billed more than work completed
progress billing = contra asset to CIP (normal credit balance)
CIP = asset (normal debt balance)

73
Q

if billing < CIP

A

=current asset (positive value)
billed less than work completed
CIP construction in progress = asset = normal debit balance
progress billing = normal credit balance (contra asset)

74
Q

CIP = construction in progress

A

asset on balance sheet, normal debit balance
progress billing is the contra asset

75
Q

billing in progress = progress billing

A

contra asset on balance sheet, normal credit balance

76
Q

completed contract method

A

same balance sheet entries as % completion
I/S = different
do not recognize revenue until project substantially complete

77
Q

relationship ending inventory and retained earnings

A

end inventory and COGS = inverse relationship
ending inventory and RE= direct relationship
end inventory increased = decrease COGS= increase net income and RE and EQ

78
Q

compute cash flow for operating activities

A
  1. net income/loss
  2. add noncash (amort/deprec/bad debt)
  3. deduct gains
  4. add losses
  5. analyze current assets and liabilities:
    Current asset: increases = subtract decreases= add back
    Current liabilities: increases = add back and decreases = subtract
79
Q

bad debt journalized

A

DR bad debt expense
CR allowance for bad debt/uncollectible (contra asset AR)

80
Q

compute cash flow for operating activities: analyze current assets and liabilities

A

Current asset: increases = subtract decreases= add back
Current liabilities: increases = add back and decreases = subtract
EX increase in AR = decrease in cash flow (no cash yet for services/goods)
decrease AR = increase in cash flow

81
Q

statement of cash flows and accounting for current assets (inverse)

A

increase in current assets= decrease CF
decrease current assets = increase CF

Increase in inventory = decrease CF
decrease in inventory = increase CF
Increase in prepaids = decrease CF
decrease in prepaids = increase CF
Increase AR = decrease CF
decrease AR = increase CF

82
Q

statement of cash flows and accounting for current liabilities (direct)

A

increase current liabilities = increase CF
decrease current liabilities = decrease CF

EX less liab = less cash as cash paid out
more liab = more cash as cash not paid out

83
Q

which of the following is an ingredient of the fundamental quality of relevance (3 items)?

A

predictive value
materiality
confirmatory value

84
Q

faithful representation components

A

neutrality
completeness
free from error

85
Q

enhancing characteristics

A

comparability
verifiability
timeliness
understandability

86
Q

what is the main purpose of the conceptual framework?

A

provide useful information to decision makers (investors, creditors, etc)

87
Q

according to FASB and IASB conceptual frameworks, neutrality is a component of ___

A

faithful representation

88
Q

which is a fundamental qualitative characteristic of financial reporting?
relevance
faithful representation
both
none

A

relevance
faithful representation

89
Q

the underlying concept that governs gain contingencies under GAAP?
conservatism
consistency
materiality
faithful representation

A

conservatism
gain = not reported for gain contingencies
loss = contingencies reported for losses

90
Q

deferred revenue (unearned revenue)

A

report as a liability until it is earned
deferral = prepaid by customer

91
Q

Prospective accounting changes?

A

prospective = change current and future financials
do not look back
both change in depreciation method and change in useful life of the asset
useful life = estimate
depreciation is treated like a change in accounting estimate as it is a change in accounting principle that is inseparable from change in estimate

92
Q

retrospective accounting changes

A

make appropriate accounting changes to prior periods

93
Q

GAAP assumption: going concern

A

the business can stay in business for the foreseeable future at least a year = assume the company can meet its financial obligations as they come due

94
Q

periodicity

A

life of a company can be separated into artificial periods: monthly, quarterly, annually
reporting financial at intervals (SEC requires 10-Q and 10-K)

95
Q

GAAP assumptions

A
  1. economic entity (biz and personal separate accounts)
  2. going concern (assume will be in biz for foreseeable future at least 1yr)
  3. periodicity (report in intervals monthly, quarterly, annually)
  4. monetary unit (USD for US, account for inflation as needed)
96
Q

GAAP principles

A
  1. revenue recognition = when earned
  2. expense recognition = when incurred
  3. measurement= (historical cost, NRV, replacement cost, current cost, PV of FCF, FMV)
  4. full disclosures= for users to have appropriate access to financials for decision making
97
Q

revenue recognition

A

when earned = when earnings process is compete or near complete
collectability reasonably assured
use matching principle
FASB= recognize revenue when goods or services are transferred to the customer for the amount the company expects to be entitled to receive in exchange for those goods/services

98
Q

COGS= results from sale

A

raw material-> WIP (labor, OH)-> finished goods/inventory->
sell->COGS

99
Q

expense recognition (matching principle)

A

expenses follow revenues
recorded in period incurred and matched against revenue
when incurred for the period, expenses recorded that helped generate that revenue
1. cause and effect (COGS)
2. associate expense with revenue recognized at the specific time (wages, utilities, rent) -> exp helped generate rev
3. by systemic, rational allocation to specific time period (depreciation, amortization)
4. in period incurred without regard to related revenue such as advertising expense

100
Q

measurement: what dollar value do we assign?

A
  1. historical cost (objective)
  2. net realizable value
  3. replacement costs
  4. current cost
  5. present value of FCF
  6. fair value

spectrum:
historical cost————————————————fair value

101
Q

historical costs

A

objective measurement (PPE)
original transaction value = purchase price which is adjusted for deprec/amort
bldg= accumulated depreciation
assets= what is given in exchange (cash)

102
Q

net realizable value

A

amount of cash into which an asset is expected to be converted in the ordinary course of business
AR less uncollectible = NRV

103
Q

replacement cost

A

lower of cost or market
inventory = LCM
estimated sell price in ordinary course of biz less reasonably predictable cost of completion, disposal and transportation

104
Q

current cost

A

the cost that would be incurred to purchase or reproduce the asset
used in inflationary times

105
Q

present value

A

present value of future cash flows (TVM)
Ex bonds, ARO, impairment

106
Q

fair value

A

FMV= the price that would be received to sell assets or paid to transfer a liability in an orderly transaction between market participants at measurement date
No fire sale or liquidation

107
Q

SFAC statement of financial accounting concepts

A

objective: qualitative, cost constraints
elements of financial statements:
A=L+E
investment by owners, distribution to owners
REGL
comprehensive income
assumptions and principles

108
Q

full disclosures

A

include any info that could influence decisions for external users
parenthetical comments
disclosure notes (lawsuits, commitments)
supplemental schedules and tables
what accounting methods used?

109
Q

Balance sheet: Assets

A

resources owned or controlled by the business that provide current and future benefit as a result of past transactions
EX PPE, cash, inventory, AR

110
Q

Balance sheet: Liabilities

A

obligations (debt)
future sacrifice of an asset (usually cash) to settle a current liability generated in the past
Ex notes payable, accounts payable

111
Q

Balance sheet: Equity

A

net assets = residual interest in assets of an entity after settling liabilities

112
Q

Balance sheet: equity -> investment by owners

A

transfer of asset from investors, owners, shareholders to an entity

113
Q

Balance sheet: distribution to owners

A

this lowers retained earnings and equity
a withdrawal of assets by investors, owners, shareholders = decrease in equity

114
Q

Income statement: expense

A

decreases in assets or increases in liabilities as a result of incurring a cost to run the business and its operations
exp-> lowers net income and RE and EQ

115
Q

Income statement: revenue

A

increase in assets or reduction in liabilities as a result of delivering or producing goods and services from the company’s ongoing and major operations
revenue-> increases net income and RE and EQ

116
Q

Gains

A

increases in assets or reduction of liabilities as a result from peripheral or incidental transactions of an entity EX sell PPE
gains = peripheral ops
revenues = central ops

117
Q

Losses

A

decreases in assets or increases in liabilities as a result of peripheral or incidental transactions of the entity

118
Q

Net income

A

REGL
Net income = revenue - expense + gain - loss

119
Q

comprehensive income

A

= net income + OCI
changes in equity other than owner sources
PUFI (pensions, foreign currency, investment risk, unrealized gain/loss fromAFS sec and hedges)

120
Q

statement of financial position

A

= balance sheet
B/C components:
assets
liabilities
equity

CPA FAR Exam (25 decks)

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