cpa1 Flashcards
What does TID stand for in the GAAS general standards?
Training, Independence, and Due professional care
What does PIE stand for in the standards of field work?
Planning and supervision, Internal Control, and Evidence
What does GCDO stand for in the standards of reporting?
GAAP, Consistency, Disclosure, and Opinion
When is an adverse opinion rendered?
When a severe GAAP departure is present in the financial statements.
What are the two main differences between the standards of attestation and the auditing standards?
The attestation standards and generally accepted auditing standards differ conceptually in two main areas: 1) the attestation standards provide a framework for the attest function beyond historical financial statements; and 2) the attestation standards provide for the growing number of attest services in which the practitioner expresses assurances in forms other than the positive opinion.
Formula for days sales in acc receivable?
Acc rec / credit sales per day.Credit sales per day = Total credit sales / 365.
Adj entry for wages at end of year that weren’t recorded:
DR: Operating expensesCR: Accrued wages payable(accrued liab)
Why would an auditor modify the auditor’s report based on the work of a specialist?
If there is a difference between the specialist’s valuation of an asset and the client’s.
who should make up the audit committee?
members of the board or directors who are not officers or employees
what are the 3 general standards?
adequete training, independence of mental attitude, and due professional care
3 fieldwork standards?
adequete planning, understanding the entity and its internal control, sufficient and appropriate audit evidence
the auditors judgment of the overall fairness of the financial statements is applied within the framework of?
generally accepted audit principles
what does the auditor primarily use to come up with materiality?
the prior year financial statements
basics of independence concerning a close relative?
CR can have a financial interest in the audit client as long as the amount is immaterial to them. CR can work for the audit client as long as its not in accounting or financial reporting. CR can work for audit firm, and is not a covered member unless the person works on the engagement team or can influence the members of the engagement team or the audit itself
when planning a new audit, why would the auditor consider the methods used to process accounting information?
Because the methods influence the design of internal control
who appoints the PCAOB?
SOX created the PCAOB and it is overseen by the SEC
under securities act of 1934 what organizations are required to submit audited financial statements?
every company traded on national and over the counter exchanges
primary purpose of establishing quality control procedures for deciding whether to accept a new client?
minimize likelihood of association with clients whose management lack integrity
to succeed in legal action against the auditor, the client must be able to show that?
the CPA had duty to perform, the CPA breached the contract, the client suffered losses, and that there is a close causal connection between the auditor’s behavior and the damages suffered by the client
detection risk?
risk that auditor concludes no material misstatement exists when there actually is one
3 components of audit risk?
inherent risk, control risk, detection risk. They are multiplied together: .8 x .75 x .25 = .15 audit risk
if inherent risk is .8 and control risk is .2, what does the auditor do to lower audit risk?
increase and perform substantive testing to reduce detection risk to the point that it equals the acceptable level of audit risk
why are inherent risk and control risk different than detection risk?
inherent risk is the possibility of a material mistatement due to lack of human and system technology. Control risk is risk of material error that is not prevented or detected on a timely basis by the client’s internal controls. Detection risk is risk that the auditor misses a material error. Thus, inherent risk and control risk are functions of the client and its environment while detection risk is not
the risk of material misstatement refers to:
the combination of inherent & control risk. Multiplying IR by CR results in the ‘risk of material misstatement’
the level of detection risk is inversely related to:
the assurance provided by substantive tests. As the auditor performs substantive procedures he becomes more and more sure there are no material errors exist, and detection risk goes down
the audit program should be designed so that sufficient evidence is gathered to:
support the auditor’s conclusions
Do most illegal acts affect the fin statements directly or indirectly?
indirectly.
if you uncover an illegal act at a public company, the auditor is required to notify:
the SEC
when auditor has reason to believe an illegal act has ocurred, he should do what?
consider accumulating additional evidence, inquire of management at a level above those who did the act, and consult with the client’s legal counsel
what is lapping fraud?
you steal customer A’s money, then you get customer B’s money and apply it to A’s account, then get C’s money and apply it to B’s account, and so on
what is kiting?
money is moved from one account to the other but in different time periods to inflate the amount being reported
does the PCAOB make auditing standards that must be followed by all CPAs?
it only makes auditing standards for public companies
is the PCAOB a gov agency?
no
what is an S-1 form?
a form that must be filed with the SEC whenever a company plans to issue new securities to the public
what is auditors responsibility for supplementary information such as segment info?
auditor should apply limited procedures to the required info and report deficiencies in or omission of such info
who creates auditing standards for private companies?
the AICPA
what is form 8-K?
the form filed with SEC to report a significant event
how long do you have to dispose of stock in a client if you inherited some unsolicited?
30 days
do operating leases and claims against clients for immaterial amounts impair indedpence?
no
are statements in the standards that include the word “should” mandatory?
they are considered presumptively mandatory- the auditor can depart from them if justification is documented
what is the completeness assertion concerned with?
determining that all transactions are recorded
in testing the existence assertion for an asset, the auditor normally works from the ______ to the _______
accounting records to the supporting evidence
according to SOX how long does a firm keep audit documentation?
have to keep it 7 years
what is the best place to put in writing the understanding between client and firm about what will take place during the audit?
the engagement letter
to see if checks are being issued for unauthorized purchases, the auditor would most likely select testing from the population of:
canceled checks
what does tracing shipping docs to sales invoices accomplish?
that all items shipments have been invoiced
most effective control over recorded purchases?
supporting forms such as purchases orders and receiving reports are independently compared for agreement
if trying to detect overstatement of sales, you start with the:
accounting records and trace to the source documents
what is pervasiveness?
the extent to which an exception affects different parts of the financial statements
difference between adverse opinion and disclaimer of opinion?
adverse opinion is stating that the financials do not fairly present the position of company in accordance to GAAP. Disclaimer of opinion is when a material uncertainty affects the financials
what paragraph explicitly states the auditors responsibility to express an opinion?
the opening paragraph of the standard audit report
when would a lack of independence cause a disclaimer of opinion?
in all cases
if the financials and/or footnotes fail to disclose information that is required by GAAP, what type of opinion is issued?
adverse or qualified. if qualified, an extra paragraph would be added that describes the nature of the missing info, and the opinion paragraph would have an extra sentence “except for the information discussed in previous paragraph”
on a public company audit, are the reports on the financial statements and internal controls issued separately or combined?
it can be either
what are the 2 situations which result in a qualified opinion?
1) when the statements are materially misstated due to one account balance or class of transaction that does not have a pervasive effect on the statements2)when the auditor is unable to obtain audit evidence regarding a particular account balance that does not pervasively affect the statementsEssentially either a single deviation from GAAP or a scope limitation. The report itself is very similar to an unqualified opinion but an extra paragraph is added to explain the qualification after the scope paragraph but before the opinion paragraph
how many paragraphs does a standard unqualified report have and what are they?
- The introductory paragraph states the audit work performed and states the responsibility of the auditor and auditee in relation to the financial statements, the scope paragraph details the scope of the audit work, and the opinion paragraph simply states the unqualified opinion
when is an adverse opinion issued and how does the report change?
Adverse is the opposite of an unqualified opinion. It means that the financial statements as a whole are materially misstated and do not conform with GAAP. or the “differ pervasively” from GAAP. On the report, the scope paragraph is modified accordingly and an explanatory paragraph is added after the scope paragraph but before the opinion paragraph. In the opinion paragraph, the auditor specifically states that the statements are not in accordance with GAAP.
What situations would result in a disclaimer of opinion?
When the auditor is not independent or there is a conflict of interest.When a limitation on scope is imposed by the client and the auditor cant gather sufficient audit evidence.When there is a substantial going concern issue.When there are significant uncertainties in the business of the client.
when an auditor selects one or a few transactions and follows them through the entire accounting process, he is doing what?
a walkthrough. A walkthrough combines observation, documentation, and inquiry. PCAOB Standard 2 requires at least one walkthrough per major class of transaction
which section of SOX requires mgmt to issue an internal control report?
Section 404 requires auditors to assess and report on the effectiveness of the internal control over financial reporting
what is the definition of incompatible functions?
those that place any person in a position to both perpetrate and conceal errors or irregularities in the normal course of their duties. well designed controls should separate the duties of authorization, record keeping and custody of assets
what is the primary purpose of the auditors consideration of internal controls?
to determine the nature, extent, and timing of audit tests to be applied
if the auditor finds a reportable condition in internal controls, who should they tell first?
the audit commitee
if after understanding the ICs the auditor decides to perform tests of controls, the auditor most likely decided that:
it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests
what is the concept of reasonable assurance?
recognizes that the cost of internal controls should not exceed the benefits derived
7 factors of the control environment: (I see ham bone)
I- integrity and ethical valuesC- commitment to competenceH- human resource policies and practicesA- assignment of authority and responsibilityM- management’s philosophy and operating styleB- board of directors or audit committee participationO- organization
even the best designed IC can fail due to:
human error, faulty judgement, collusion, management override
what are the five components of internal control? (clowns run cartels in mexico)
1) control environment2) risk assessment3) control activities4) information and communication5) monitoring
***What is the process of assessing risk in general?
You assess inherent risk and control risk to determine the amount of substantive testing that must be carried out to reduce detection risk to a level so that overall risk will still achieve an acceptably low level. Acceptable audit risk is not changed.
what is the audit risk formula?
inherent risk X control risk X detection risk = overall audit risk
the auditor uses the assessed level of control risk to determine the acceptable level of
detection risk for financial statement assertions
if auditor increases the level of control risk because controls are found to be ineffective, the auditor would most likely increase the
extent of tests of details
what do assertions about existence or occurrence deal with?
whether assets or liabilities exist at a given date and whether recorded transactions have occurred during a given period
when an auditor assesses control risk as low, he must:
identify specific policies and procedures that are likely to prevent or detect material misstatements, and he must perform tests of controls to evaluate the effectiveness of such policies and procedures. if the tests of controls result in the control risk being assessed as low, then the auditor may limit the extent of substantive testing
what does ‘information and communication’ refer to as far as internal control within an organization?
the ability of the accounting system to generate reliable info and convey it in a timely manner to the parties in the organization that need it
What are the 5 assertions about classes of transactions and events for the period?Alistair Overeem Cant Cut Corners
Accuracy- amounts and other data have been recorded appropriatelyOccurrence- transactions and events that have been recorded have occurredCompleteness- all transactions and events that should have been recorded have been recordedCutoff- transactions and events have been recorded in the correct accounting periodClassification- transactions and events have been recorded in the proper accounts
4 assertions about account balances at end of period?Even Cain Realizes Value
Existence- assets, liabilities, and equity interests existCompleteness- all assets, liabilities, and equity that should have been recorded have been recordedrights and obligations- the entity holds or controls the rights to assets, and liabilities are the obligations of the entityValuation and allocation- assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
4 assertions about presentation and disclosure:Overeem Can’t Complain Anymore
Occurrence & rights and obligations- disclosed events and transactions have occurred and pertain to the entityCompleteness- all disclosures that should have been included have been includedClassification and understandability- financial information is appropriately presented, described, and clearly expressedAccuracy and valuation- financial and other info are disclosed fairly and at appropriate amounts
why is it best to have “blind” invoices received by the receiving department?
to make sure the receiving dep counts the incoming merchandise so that they only pay for what they received
what is the purpose of purchase cutoff testing?
to determine that items actually received in inventory have been included in the proper period
what is an integrated test facility?
it puts fake transactions in with real transactions which are processed together without client employees knowing it
a person who mails signed checks can also:
cancel the supporting documents
an effective control over purchases would be to have the purchasing department authorized to:
purchase, but not initiate purchases
an increased extent of tests of controls is most likely to occur when:
controls appear to be effective so that the preliminary control risk assessment is low. this is because auditor can then do less substantive testing.
are significant deficiencies and material weaknesses supposed to be relayed orally or written to those charged with governance?
AU 325 says that sig def and material weaknesses in a public company must be communicated in writing to the audit committee of the board of directors
when should control deficiencies be reported?
either during the audit or after the audit’s completion, within 60 days of the report release date
management must disclose material weaknesses in internal control if the weakness exists:
at the end of the year
what are the 2 types of control deficiency?
design and operations. design means its poorly designed, while operations means the people performing their tasks are doing them deficiently
what is ratio estimation used for?
to measure the total estimated error amount within a population
there is an inverse relationship between sample size and:
tolerable error. as the tolerable error decreases the sample size would increase
what is sampling risk?
the risk that the sample chosen doesn’t accurately represent the population
How is the allowance for sampling risk calculated?
It’s the difference between the upper limit and the deviation rate of the sample.
what are embedded audit modules?
coded into the clients system to collect data for the auditor
purpose of test data approach?
test data is entered with a known outcome into client’s system to see if it produces same result
under the PCAOB standards, a scope limitation related to internal controls over financial reporting should result in:
a disclaimer of opinion.
if a control deficiency is discovered, what is the next step?
determine if it is a material weakness by gathering additional evidence
what opinion is rendered if there is one or more material weakness in internal control over fin reporting?
an adverse opinion
“if this statement is not correct… give details of difference directly to our auditors
acc rec confirmation
“in our opinion, these statements audited by us comply in all material respects”
comfort letter to underwriters
“no claims that OUR lawyer…”
management rep letter
“which raises substantial doubt about its ability to continue as a going concrern”
auditors report
CPA is associated with the financial statements, but is NOT independent
Compilation report
providing NEGATIVE assurance on a company’s financials
review report
material departure from GAAP but NOT materially misstated
qualified report for GAAP departure
how often does an internal audit activity need to be assessed externally?
every five years.
what are the primary themes associated with internal audit attribute standards
(1) Purpose, Authority, and Responsibility; (2) Independence and Objectivity; (3) Proficiency and Due Professional Care; and (4) Quality Assurance and Improvement Program.
the 7 primary themes of the performance standards:
(1) Managing the Internal Audit Activity; (2) Nature of Work; (3) Engagement Planning; (4) Performing the Engagement; (5) Communicating Results; (6) Monitoring Progress; and (7) Resolution of Senior Management’s Acceptance of Risks.
in a conventional graph, the ‘intercept’ is the point at which:
the dependent variable intersects the Y axis, and where the independent variable has the lowest value, usually zero
elasticity of supply?
%change in quantity supplied/%change in price
what is elasticity of demand?
the % change in quantity is greater than the % change in price
how do you prevent deflation?
you increase the money supply by lowering the reserve requirement, or lowering interest rates which stimulates demand and increases the general price level
what does an import quota do?
it restricts the quantity of a commodity that can be brought into the country from foreign providers. The biggest beneficiary is the domestic suppliers of the commodity.
3 generic strategies by Michael Porter?
cost leadership, differentiation, and focus
which framework is for gauging the attractiveness of the competitive environment of an industry?
five forces
what analysis method is for evaluating a macro-environment?
PEST analysis: political, economic, social, and technological characteristics
what are the five forces?
1-threat of new competition entering the market2-threat of substitute goods or services3-bargaining power of buyers of the industry good or service4-bargaining power of suppliers of the inputs used in the industry5-intensity of rivalry
what does SWOT stand for?
strengths and weaknesses of the entity, and the opportunities and threats faced by the entity
how is weighted avg cost of capital calculated?
the required rate of return on each source of capital weighted by the proportion of total capital provided by each source and then those amounts are summed.debt:30%x(10% 1-30% tax rate)=2.1%CS: 60%x12%= 7.2%PS: 10%x10%= 1%WACC= 10.3%
what is a compensating balance and how is the effective interest rate calculated?
an amount the borrower has to maintain in an account with a lender.the effective int rate is the cost of borrowing divided by the funds available for use.If the interest each year is 40,000 and the only amount you can actually use is 400,000, then the effective rate is 10%.
how is the required rate of return calculated?
risk free rate + Beta(expected rate - risk free rate)
basic approach to capitalize earnings to determine value of business?
annual earnings / required rate of return.
what is a time series model?
models based on extrapolation of past data to predict a future value
delphi method?
form of qualitative forecasting that involves consensus of a group of experts using a multi-stage process to converge on a forecast.
diff in quantitative & qualitative forecasting?
quantitative is objective and rely on math and calculations. qualitative are subjective and rely on judgement and opinion
what is the profitability index approach?
the relative economic ranking of projects by taking into account the cost & net present value of projects
average accounting rate of return?
avg annual after tax net income / avg cost of investment.the avg cost of investment is the beg book value + ending bv then divided by 2.
formula for calculating the profitability index of a project?
present value of annual after tax cash flows / original cash invested in the project
NASDAQ requires all companies have audit committees composed entirely of:
Independent directors who are also financially literate
can board of directors change the articles of incorporation?
no, only stockholders can do that
the purchase and sale of commodities for current delivery is what:
the spot market. the futures market is for delivery in the future
what is a specialist on the NYSE?
a NYSE member acting as a dealer in a small number of securities
what is a call option?
the right to purchase a security at a specified price for a defined period of time.
what factors make up the nominal risk free rate?
the real rate of interest and an inflation premium
if the Fed reserve purchases a large number of US gov securities, what is the effect?
it increases the monetary supply and puts downward pressure on interest rates
what is a put option?
it lets you sell a stock at a certain price for a period of time.
what is transfer pricing?
the pricing strategy for products and services bought and sold across international borders between related parties. it is mainly part of tax planning.
capital structure refers to:
all long-term debt and equity
the market price of a bond is the present value of the principal amount plus:
the present value of future interest payments at the market rate of interest
cost of capital for newly issued preferred stock?
net proceeds per share / annual costs40 sales price less 5 issuance costs = 35.if par value is 20, @9% int. payments are 1.80calculation is 1.8/35=5.1%
what is the CAPM formula?
Expected return= RF + B(RM-RF)RF means risk free rate.B means betaRM means return on market
between 2 investments with the same expected return, choose the one with:
lower projected standard deviation
between 2 investments with different expected returns and standard deviations, choose the one with:
lower coefficient of variation
What is NPV?
net present value is the present values of future cash flows less the cost of the investment. If the NPV is above zero then it’s a good investment.
How do you calculate NPV?
it’s the present value of future cash flows discounted to present value using the COST OF CAPITAL
what is the basic FV calculation?
FV= current amount x(1+i)^nor1,000 times(1+0.1)^5
what is the rule of 72?
a very close estimate for seeing how long it takes for an investment to double. You just divide 72 by the interest rate. If the interest rate is 8% you divide 72/8=9
what does the security market line(SML) graph?
the relationship between expected return and risk as measured by the beta coefficient
How to calculate the benefit cost (profitability) index?
present value of cash flows / net investment. an index greater than 1 means the project is acceptable
what does the equivalent annual annuity(EAA) technique evaluate?
projects that have different durations(lives)
times interest earned calculation?
Earnings before interest and taxes / interest expenseThis is telling you how many times you earned your interest during the period
cash conversion cycle?
period beg with paying cash for inventory and ending with the collection of cash from the sale of products made with that inventory
what is underwriting?
investment bank buys an entire offering then tries to sell it to the public at a profit
least expensive long-term source of capital?
long term debt because interest is tax deductible and debt is repaid first so it has less risk
formula to determine the cost of common stock:
next period’s dividend / proceeds such as 2/50 which equals 4%. then you add this to the firms growth rate in dividends. If growth rate the cost of common stock would be 7+4 for 11%
what are the chronological events in the dividend payment process?
1-declaration date when board approves dividend2-ex dividend date is first date you buy stock without being entitled to the dividend3-date of record is date you must own shares by to receive dividend4-payment date is when checks are mailed
how is financial leverage calculated?
It is calculated by taking the percentage increase in earnings per share which is then divided by the percentage increase in earnings before interest and taxes. Here, earnings per share starts as $4.00 and increases by $2.00, a 50 percent increase. Earnings before interest and taxes starts as $300,000 and increases by $60,000, only a 20 percent increase. Therefore, the degree of financial leverage is 50 percent divided by 20 percent or 2.5.
what are the 4 reasons to hold cash?
transactions to meet day to day cash outflows, compensating balances required by banks, precautionary balances to meet unexpected events, and speculative balances to take advantage of opportunities
cash conversion cycle?
age of inventory + age of receivables - age of payables
4 parts of a company’s credit policy?
(1) Credit period–when the payment is due; (2) Credit standards–criteria as to which customers are granted credit; (3) Collection policy–enforcement of the collection process; and, (4) Discount–reductions offered to speed up payments.
Your supplier gives you credit terms of 2/10 net 30. This means that if you pay within 10 days you take a 2% discount. If not, the balance is due in full within 30 days. What is the annual percentage cost to you of not taking the discount and paying on the 30th day?
Your choice is to pay $.98 on the dollar on day 10 or $1 on day 30. The extra cost is .02/.98 or .0204081. You save 20 days (30-10) by paying later. To annualize the cost take 365 days and divide by the days saved. 365/20=18.25 and multiply this by the .0204081 percent cost: (.0204081) (18.25) = 37.24%
A manufacturer of single engine aircraft operates 365 days per year and produces 3,650 aircraft per year. Its engine supplier takes 5 days from the time an order is placed to deliver engines. Assuming the manufacturer does not wish to carry a safety stock, at what level of engine inventory should they place an order (reorder point) for new engines to ensure that production is not interrupted?
Economic Order Quantity points (EOQ) tells you how many engines to order at one time. It is determined by taking the square root of the following result: 2 times annual demand (1,600 units) times the cost of placing an order ($50) divided by the cost of carrying a unit for a year ($1). So, (2 x 1,600 x 50) or 160,000. That is then divided by $1 so that it stays 160,000. The square root of 160,000 is 400. That is the number of units that should always be ordered. Because 1,600 are needed, the orders of 400 are placed four times per year.
A manufacturer of single engine aircraft operates 365 days per year and produces 3,650 aircraft per year. Its engine supplier takes 5 days from the time an order is placed to deliver engines. Assuming the manufacturer does not wish to carry a safety stock, at what level of engine inventory should they place an order (reorder point) for new engines to ensure that production is not interrupted?
In the absence of a safety stock, reorder point is equal to daily usage times the time it takes for a supplier to deliver. Daily usage is 3,650/365 or 10 x 5 days to deliver (lead time) is equal to 50 engines as a reorder point.
average days sales in inventory?
360 / inventory turnoverinventory turnover= COGS/ Avg inventory
What does a TPS do?
it supports the day to day activities of a business such as purchasing goods, sales to customers, and payroll
ROI calculation?
net income / avg investment
alternate ROI calculation?
asset turnover x profit margin on sales
what is the dupont ROA?
(net income/net sales) x (net sales/avg total assets)
asset turnover?
sales / assets
which risk cant be mitigated through diversification of investments?
systematic risk because it deals with the macro environment
what does the systems analyst do in an IT environment?
designs systems, prepares specifications for programmers, and serves as intermediary between users and programmers
what detects errors in data transmission?
a parity check
margin of safety?
difference between your actual or expected profitability and the break even point
what is the floor and ceiling in a transfer pricing decision?
the floor is opportunity cost plus costs of outlay. the ceiling is the market price
target pricing?
set prices based on what you think customers are willing to pay based on perceived value
economic value added?
net operating profit after taxes less cost of capital
does deflation encourage or discourage borrowing?
deflation discourages borrowing because people want to borrow money in times of inflation because you can repay it with money with less purchasing power
when interest rates increase, bond prices:
decrease. and vice versa
how is the overhead rate calculated?
dividing estimated overhead costs(both variable and fixed) by a budgeted or estimated quantity of a cost driver. Example: total overhead costs of 75,000 divided by 20,000 budgeted direct labor hours for a overhead application rate of 3.75 per direct labor hour
conversion cost?
direct labor + overhead
how is a spoilage question done?
normal spoilage is a manufacturing cost because it’s an inherent part of production, so it is included in finished goods.Abnormal spoilage is treated as a period cost.If total units completed are 5500 with 5000 being saleable, 200 being normal spoilage, and 300 being abnormal spoilage, then 5200 is included in finished goods. so 5200/5500 times the total cost:(5200/5500)*99,000=93,600 which is what will be debited to finished goods
how to use high-low method:
total costs y=a+b(x)y=total costsa=fixed costsb=variable cost per unitx=number of kilos,etcb is change in costs divided by change in kilos, or (y2-y1)/(x2-x1)
what does the CPU contain?
primary storage, a control unit, and an arithmetic/logic unit
what is primary storage?
temporary main memory portion of the CPU which is part RAM part ROM. Secondary storage consists of devices external to the CPU such as disks, flash drives, & hard drives
elements of assembly language:
must be translated into machine language by an assemblereasier to write programs in than machine languageit’s an efficient form of second gen language
elements of a procedural language:
3rd gen language that concentrates on the procedures and functions of the programs. written in source code then translated into object code. source code is more similar to english but object code is the machine language for the type of computer. FORTRAN, COBOL, and BASIC are all forms of procedural languages
what does a JCL do?
Job control language initiates programs, specifies priorities and running sequences, and which databases are used and which files are used
What is the order of creating master budget?
sales budget is first, then production budget, budgeted income statement then budgeted balance sheet
absorption costing?
assigns all 3 factors(direct material, direct labor, and both fixed and variable manufacturing overhead) to inventory
direct costing?
assigns only variable manufacturing costs to inventory- which means variable manufacturing overhead
what does r squared actually mean?
percentage of variation in the dependent variable explained by the variation in the independent variables
what are x and y in a line equation?
x is the independent variable, and y is the dependent variable.
overhead efficiency variance?
The overhead efficiency variance is the difference between actual direct labor hours worked, and the standard quantity of hours allowed for actual production, times the variable overhead rate per hour.
overhead volume variance?
The overhead volume variance equals the difference between the master budget for fixed overhead and applied fixed overhead. The variance has one cause only: producing a number of units different from that specified in the master budget.
labor efficiency variance
The labor efficiency variance is the difference between actual direct labor hours worked, and the standard quantity of hours allowed for actual production, times the direct labor wage rate per hour.
material usage variance?
This variance is the difference between the actual quantity of material used, and the standard quantity allowed for the output achieved, times the standard price of material.
Diff between spending variance for fixed overhead and variable overhead?
The spending variance for variable overhead is the difference between the actual overhead and the budgeted overhead based on actual direct labor hours. The spending variance for fixed overhead is the difference between the actual overhead and the master budget for fixed overhead. Neither variance is affected by the denominator used for allocating fixed overhead.
what is incremental or differential cost?
the total difference in cost of two alternatives.
Residual income formula?
Residual income = operating income - required rate of return (invested capital)
using PERT or CPM, activity slack is?
max amount of time an activity can be delayed without delaying the entire project
what are the 2 distinct functions of the information systems department?
systems development and data processing
liason between end-users and the processing center?
the control group.
what are the 3 main types of system documentation?
data flow diagramssystem flowchartsentity relationship diagrams
What AICPA framework relates to “reliable systems”?
AICPA’s Trust Services provides assurance on systems.
what 3 IT functions need to be separated?
programming, operations, and the library
daily operations of the website?
Web coordinator
control activities defined?
Control activities include all of the policies and procedures used within a sytem to help ensure that all management directives are performed as anticipated. Each system is supposed to perform designated tasks. Control activities are installed to ensure those tasks get accomplished efficiently and effectively.
5 examples of information goals?
(1) input validity - where input data be approved and reflect accurate economic events (2) input completeness - all valid events are captured (3) input accuracy - all events are captured correctly (4) update completeness - all events are reflected in respective master files (5) update accuracy - all events are reflected correctly within master file.
controlling computer operations is controlled by:
Segregation controls, backup and recovery, contingency processing, file protection rings and internal and external labels represent methods to control computer operations. Segregation controls represent controlling access to programs and data.
There are five risks associated with e-commerce, according to the Trust Services framework established by the AICPA. These risks are:
1) security, 2) availability, 3) processing integrity, 4) online privacy, and 5) confidentiality.
4 categories of IT resources under COBIT:
applications, which include systems and manual procedures to process information; the information itself; infrastructure, which includes hardware, equipment, and operating systems needed to process information; and people.
4 components of the COBIT framework’s IT process model:
1) plan and organize, 2) acquire and implement, 3) deliver and support, and 4) monitor and evaluate. Abbreviated, these components are referred to as: Plan, Build, Run, and Monitor.
Who established COBIT?
The Information Systems Audit and Control Association (ISACA)
definition of net present value?
present value of cash inflows minus the net investment
definition of internal rate of return?
the specific discount rate that makes the present value of the inflows equal to the net investment and forces the NPV to be equal to zero
market value added?
market value of the firm minus the book value of the capital investment in the firm
economic value added?
net operating profit after taxes minus the firm’s cost of capital in dollar terms
ROA (return on assets):
net income divided by total assets
ROE(return on equity):
net income divided by total equity
ROIC (return on invested capital)
net income plus interest divided by average total invested capital. invested capital is just interest bearing debt plus owners equity
what are the 4 elements of a balanced scorecard?
financial, customer, internal processes, and learning & growth
after a performance measure has been accepted, what is the next step?
the current level of performance should be determined (baseline performance), a designated performance rate or a designated improvement rate should be set (targets), and actions needed to achieve those targets should be designated (strategic initiatives)
free cash flow?
net operating profit after taxes (NOPAT), add in depreciation expense, then subtract money set aside for capital expenditures and any need for increasing working capital
receivables turnover?
net credit sales / avg acc receivable
number of days sales in inventory?
COGS divided by 365. Then divide avg inventory by the first number.
financial planning process:
1) analyzing the investment and financing alternatives available to a firm, 2) forecasting the future consequences for each of the alternatives, 3) deciding which alternatives to undertake, 4) measuring subsequent performance against established goals. Measuring the subsequent performance is the final step in that process.
what are the steps to process improvement?
1) design, 2) modeling (which involves simulation of the process), 3) execution (including training of personnel and testing of the process), 4) monitoring, and 5) optimization.
what is a pareto chart?
a bar chart or histogram that ranks the causes of variations in a process from most to least frequent, which is intended to indicate their effects on quality
what is a control chart?
measures deviations from process standards, a fishbone diagram identifies causes of defects and their effects
steps in project management:
project initiation, project planning, project execution, project monitoring and control, and project closure
a cost management system is:
a planning and control system that measures the cost of significant activities, identifies non value-added cost, and identifies activities.
relevant range?
level of activity where fixed costs remain fixed
diff between theoretical capacity and practical capacity?
Theoretical capacity assumes output is produced 100% of the time. Practical capacity adjusts theoretical capacity for non-production time such as holidays and maintenance shutdowns.
Utilizing the expected annual capacity approach to overhead application, can result in overapplied overhead when:
Actual overhead costs were less than expected and/or production was higher than expected.Overhead is applied based on a calculated rate per unit. This calculated rates uses estimate overhead costs divided by an estimated activity level. If either the estimated overhead is higher than the actual overhead or the estimated activity level is lower than the actual activity level, overhead can be overapplied.
labor rate variance?
actual rate paid minus standard hourly rate times the total hours worked
labor efficiency variance?
number of hours worked less hours supposed to have been worked times the standard rate
material price variance?
diff of total price paid and total price should have paid for the same amount
fixed overhead spending variance
It is the difference between the actual overhead spending and the budgeted overhead spending.
when doing weighted avg cost of capital calculations, what needs to have taxes removed?
the cost of capital for DEBT must be computed net of the tax benefit provided by the deductibility of the interest expense
how to find effective rate of interest on a compensating balance question?
cost of borrowing / funds available for useIf you have 500,000 at 8% interest that equals 40,000 in interest expense. but if you can only use 400,000, then the calculation is 40k/400k for an effective rate of 10%, not 8%
difference between performance standards and attribute standards
attribute standards describe the characteristics of organizations and people who perform internal audit services.performance standards describe internal auditing and identify the quality criteria applicable to the performance of the internal audit services
what percentage can a whistleblower get for a dodd-frank award?
10% and 30% of sanctions imposed
what is the slope of a demand curve?
it is negative. the lower the price, the greater quantity demanded
a positive GDP gap exists when:
potential GDP exceeds real GDP. This means that the economy is operating at less than full capacity- which implies unemployment and under-utilized plant and equipment
2 largest export countries?
germany and china- each about 9%
US share of worldwide GDP is:
approximately 25%
which type of employment is not considered in calculating full employment?
cyclical- the other 3 types can exist and still have “full employment”
a supply schedule shows the relationship between the quantity of a commodity that will be supplied during a period of time and:
the selling price of the commodity. A supply curve is basically saying that as price increases, more sellers would enter the market and more of the good would be supplied
freely fluctuating exchange rates:
automatically correct a lack of equilibrium in the balance of payments
what would the Federal Reserve NOT do to stimulate the economy?
Reduce tax rates. The Fed Reserve does not change tax rates. This would stimulate the economy, but tax rates are set by Congress, not the Fed. The Fed could reduce the reserve requirement, reduce the discount rate which would increase loan activity, and they could increase the money supply.
who controls fiscal and monetary policy?
The Fed controls monetary policy(money supply), and Congress controls fiscal policy(gov spending and taxes)
calculate marginal propensity to consume:
change in spending over change in disposable income
calculate avg propensity to consume:
% of disposable income spent on consumable goods
the preventive measure for deflation?
increase the money supply. this stimulates demand and increases the general price level
how does deflation distort reported income?
depreciation is NOT reflective of current fixed-asset replacement costs?
what is SWOT concerned with?
the relationship between an entity and its environment
what is the 5 forces concerned with?
the nature, operating attractiveness, and probably long-run profitability of a competitive industry
what is the basis for a natural monopoly?
economics of scale- or an increasing return to scale.
in a perfectly competitive market, what is the best level of output for the firm?
Marginal revenue = marginal cost.
the direct exchange rate expresses the domestic price (in dollars) of:
one unit of foreign currency. 1 euro to $1.15
PEST is acronym for:
political, economic, social, and technological
What does PESTEL add to PEST?
E= environmental factorsL= legal factors
required rate of return for an investment:
riskfree rate + beta(expected rate - riskfree rate)
diff in financial structure and capital structure:
financial structure includes all items of liabilities and owners equity, and capital structure includes LONG-TERM liabilities and owners equity.
what time series model reduces random fluctuations in data?
exponential smoothing
what source of new capital usually has the lowest after tax costs?
bonds. less risk to investors so they’re cheaper than equity, and the interest payments are tax deductible
what states the terms of a bond?
an indenture
what is the profitability index used for?
to rank potential investments by taking into account both the time value of money and the initial cost of the project
what is commercial paper?
short term, unsecured promissory notes
calculate profitability index of a project?
divide present value of annual after tax cash flows by the original cash invested in the project
what is residual income that remains after the cost of all capital, including equity capital, has been deducted?
economic value added. it measures economic profit, not accounting profit. NOPAT minus cost of capital
accounting rate of return?
dividing accrual based net income by the initial cost of the project
what is EDI for?
electronic data interchange allows companies to place orders with suppliers electronically
what kind of network is used to process EDI?
Value added network- VANs provide the additional security and addressing capabilities necessary to process EDI transactions
rollback and recovery procedures are most common in:
online real-time systems. periodic snapshots are taken of a master file, and upon detection of a problem, the system reprocesses all transactions that have occurred since the snapshot
who designs, creates, and tests program?
application programmers
a fire supression system in a computer facility should include:
halon and other chemical suppressents that dont harm computer hardware
which critical function is most likely to be missing in a small business computing environment?
authorization
in a large firm, who would maintain custody of the entity’s data?
the data librarian
what allows a database management system to add new records, delete old records, and update records?
a data manipulation language (DML)
What is used to verify that a program was free of unauthorized changes?
a source code comparison program. this compares an archived program to the program actually in use
What is PaaS?
PaaS is the use of the cloud to create (not access) software
what is systematic risk?
market risk. large scale economic events that typically affect all companies
most likely strategy to reduce breakeven point?
decrease fixed costs and increase contribution margin
what is six sigma similar to?
total quality management
what are the 4 types of costs of quality?
prevention costsappraisal costsinternal failure costsexternal failure costs
steps for business continuity plan
create framework and structure, identify the scope of the plan, its key roles, and assign individuals to roles. Understand and evaluate organizational risks. Define alternative methods to ensure delivery of products and services. Strategy for handling crisis incidents. embed plan in organizational culture. educate, train, and make aware.
If there is commercial substance to an exchange, the exchange is measured at:
Fair Value. The gain is equal to the old asset’s fair value and it’s book value. If the fair value was 30 and its book value is 25, the gain is 5.
How does retail inventory method establish lower of cost or market valuation for ending inventory?
By excluding net markdowns from the cost to retail ratio.
Can consolidated financial statements be prepared from a business combination that was accounted for using the acquisition method OR the pooling of interests method?
Yes to both. The pooling of interest method CANNOT be used anymore for business combinations, combinations that happened before that still need to be consolidated.
Does a foreign sub using the local currency as its functional currency has their financials translated or remeasured?
Translated.
Does a foreign sub using US dollars as its functional currency has their financials translated or remeasured?
Remeasured.
Under translation, common stock is translated at the what exchange rate?
The historic exchange rate.
500 shares of 6%, $100 par callable preferred stock are called at $101. The shares were issued at $103 per share. What is the journal entry to record the retirement?
DR preferred stock for 50,000DR PIC-preferred for 1,500CR PIC retirement of preferred for 1,000CR Cash for 50,500
Working capital:
current assets - current liabilities
Acid test:
(cash + net receivables)/current liabilities
Acc Rec turnover:
Sales/ avg net receivables
Inventory turnover:
COGS/ avg inventory
Times interest earned:
EBIT/ interest expense
Return on total assets:
(net income + after-tax interest expense)/ avg total assets
Return on equity:
Net income / avg owners equity
Dividend payout ratio
Common dividends / net income
What are the 2 primary qualitative characteristics?
Relevance and Faithful representation
2 components of relevance:
Predictive value and confirmatory value
3 components of Faithful Representation
Completeness, neutrality, and free from material error
What are the 4 enhancing characteristics?
Comparability, verifiability, timeliness, and understandability
Times interest earned is:
income before interest and income tax over interest expense
What is a central characteristic of a joint venture?
Shared control. None of the participating parties are likely to have unilateral control of the joint venture.
What is the defensive-interval ratio?
The ratio of quick assets to daily operating expenditures. The ratio is showing the length of time in days that the firm can operate with its present liquid resources- so it’s a liquidity measure.
Inventory turnover ratio:
COGS/ avg inventory for the period
Where are G/L on remeasurment and translation booked?
Remeasurement is on the income statement, translation go in an equity account. Remeasurement is when the foreign sub’s currency is the US dollar. It’s translation if the sub’s currency is the local foreign currency.
Receivables turnover ratio:
Net sales / avg net accounts receivable
What statements are usually included in personal financial statements?
A statement of financial condition and a statement of changes in net worth.
If a donation is conditional, how should it be accounted for?
As a refundable advance.
For donation of specialized services to a nonprofit, at what value should they be recognized?
Fair value.
For a NP, are contributions spread over a few years restricted or non restricted?
The contribution in the current year is non restricted(unless it comes with an actual restriction), and the contributions for future years are recognized at present value and are RESTRICTED.
When are the payments for an “Annuity Due” made?
At the beginning of each period.
How is a lease payment calculated when the lease payments are due at the beginning of the period?
You divide the FAIR VALUE of the leased equipment by the ANNUITY DUE rate.
What is the journal entry at the inception of a capital lease and the payments are due at the beginning of each period?
DR: Leased asset for its fair value amountCR: Lease Liability for plug amountCR: Cash for the payment amount
How do you calculate the interest expense at the end of the year on a capital lease with payments at the beginning of the period? What is the journal entry?
You multiply the remaining lease liability amount by the interest capitilization rate.DR: Interest expenseCR: Lease liability
How does the LESSOR in a capital lease determine the amount of Lease Receivable?
Multiply the payment by the number of payments.
What is the journal entry by the LESSOR for a capital lease with payments at the beginning of each period?
DR: Lease receivableDR: Cash for the payment amountDR: COGS for the book value amountCR: Unearned interest for the lease rec amount MINUS the BVCR: Equipment for BV amountCR: Sales for the FV amount
Working capital formula
current assets - current liabilities
Acid test formula
(cash + net receivables) / current liabilities
Acc Rec turnover formula
Sales / avg net receivables
Inventory turnover
COGS / avg inventory
Avg collection period for acc receivable?
Net credit sales / avg net acc receivable…. then you divide 365 by that number
What financial statements are required for the Governmental funds?
1)Balance sheet and 2) Statement of revenues, expenditures, and changes in fund balance
What statements are required for the Proprietary funds?
1)Statement of Net Postition2)Statement of revenues, expenditures, and changes in net position3)Statement of cash flows
What statements are required for the fiduciary funds?
1)Statement of net position2)Statement of changes in fiduciary net positiion
Which fund type does the government-wide financials EXCLUDE that are included on the CAFR?
Fiduciary funds.
What are the 3 sections of the CAFR?
1) Introductory2) Financial3) Statistical
If an investment in 30% of another company is accounted for using the fair value method, what is recognized as net income from the investment?
Cash dividends received and increases in the fair value of the investment are recognized in net income from the investment. The portion of the company’s net income is NOT recognized in net income from the investment.
A contest prize expense is the present value of the?
Total cost incurred. If the prize is an annual $50,000 payment for 20 years and the company takes out an annuity of $418,250 after making the initial $50,000 payment, the contest prize expense in the current year is $468,250.
The ending balance of the asset retirement obligation should be the:
Beginning balance + the DISCOUNTED cash flow estimate of the new asset + accretion expense - the amount paid during the year.
The debt service fund records cash transfers from the general fund as what, and cash payments as what?
Operating transfers and Expenditures.
During a period of inflation, would a perpetual inventory system result in the same dollar amount of ending inventory as a periodic inventory system under FIFO and LIFO?
Yes with FIFO, No with LIFO. The perpetual system would be calculating COGS based on the latest goods acquired prior to each sale versus all the latest goods acquired during the period under a periodic system.
Does a NOL carryforward directly reduce taxes or taxable income?
Taxable income. If the NOL is 40,000 and taxable income is 60,000, then it reduces taxable income down to 20,000, which is then multiplied by the tax rate.
During a business combination, can the acquisition date be before, on, or after the closing date?
It can be any of the 3.
For state or local governments, encumbrances outstanding at year end should be reported as:
Assigned or committed fund balance.
What does income and dividends from a sub do to the investment account under the equity method?
Income increases the investment, and dividends reduce the investment account.
What is the focus of proprietary funds?
Income determination. Proprietary funds use accrual accounting and they are similar in reporting to private businesses.
What is the entry in the General Fund to record equipment purchased with a capital lease?
DR: ExpendituresCR: Other financing sourcesThe general fund doesn’t record fixed assets. The general fund fixed asset account group would record the acquired equipment.
What are funds classified as that can only be used for a specific purpose because of restraints imposed by formal action of the government’s highest level of decision making authority?
According to GASB Statement No. 54, amounts that can only be used for a specific purpose, because of constraints imposed by formal action of the government’s highest level of decision-making authority, should be reported as Committed Fund Balance. The Restricted Fund Balance classification should be used when constraints are placed on the use of resources are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments, or (b) imposed by law through constitutional provisions or enabling legislation.
What is the process for recording collection of accounts that had been written off?
First you debit accounts receivable and credit allowance for doubtful accounts to restore the amounts that had been written off. Then you debit cash for the amount collected, and you credit accounts receivable to take them off the books since they’ve been collected.
In the general fund, what 3 accounts are affected when property taxes are levied?
Revenue control is credited, property taxes receivable is credited, and allowance for uncollectible taxes is credited. Bad Debt Expense is ONLY an accrual accounting concept, and IS NOT used in modified accrual accounting.
When the direct method for LCM is used, what is the journal entry to write down inventory?
DR: Cost of goods soldCR: Inventory
When using the allowance method under LCM, what is the JE to write down inventory?
DR: Holding lossCR: Allowance for LCM
Under the fair value option, what is recognized as income from the investment company?
Cash dividends and the increase in fair value of the investment are both recognized in net income of the investor.
How does the installment sale method work?
Each payment consists of return of cost and gross profit. You calculate the gross profit percentage by taking the sales price and subtracting the carrying value, and then dividing that number by the sales price. Then you multiply the principal portion of the payment by the gross profit percentage, and then add in the interest payment amount, and that is the amount of revenue to recognize. The return of cost portion of the payment is NOT recognized as revenue.
Gains or losses on retirement of debt used to automatically be classified as extraordinary gains or losses, but now they are:
immediately recognized in full in income from continuing operations.
What rate is used to calculate the amount of dividends from a foreign currency?
The spot rate on the date of declaration is used regardless of translation or remeasurement.
How is the refinancing of a liability due within a year treated under GAAP and IFRS?
Under GAAP, if the refinancing happens before the ISSUANCE date of the financial statements, then it can be considered long term again. Under IFRS, the refinancing has to happen before the BALANCE SHEET DATE for it to be considered a long term liability again.
How is interest expense and dividends paid classified as far as cash flow under IFRS?
Interest expense and dividends paid can be classified as EITHER operating or financing activities.
How is interest revenue and dividend revenue classified under IFRS for cash flows?
They can both be either cash flows from operating OR investing activities.
If the percentage of completion method cannot be applied, how are profits recognized on long-term contracts under GAAP and IFRS?
Under GAAP the profits will be recognized once the job is completed- which is the completed contract method. Under IFRS, all profits will be recognized when all the costs have been recovered- the cost recovery method.
If an IFRS company decides to revalue its equipment each year, what effect would a drop of $2000 in value above regular depreciation be?
It would be a 2000 expense for that year, recognized in income. BUT…. an increase in the value would go under other comprehensive income.
What is the main capital lease criteria under IFRS?
That the lease life is a “major portion” of the equipment life. Thus, a lease of 60% of the equipment’s life would qualify as a capital lease.
If both parties consider a lease to be a capital lease, what interest rate do they both use under IFRS?
They both use the implicit rate built into the contract.
Under IFRS, a contingent loss must be recognized if it is…
More likely than not. Even just 51% vs 49% meets this criteria.
How is a prior service cost due to a change in the projected benefit obligation due to a contractual adjustment treated under IFRS and GAAP?
Under IFRS it is expensed immediately to the extent that benefits have vested. Under GAAP it is recorded to accumulated other comprehensive income and then amortized to expense over the years the employees are expected to work.
A bond with face value of 100k is sold at 110k due to a convert option into common stock. How is this recorded under GAAP and IFRS?
Under IFRS 100k would be the liability and the 10k is recorded as equity. Under GAAP the full 110k is debt until it is actually converted.
How is an impairment loss on equipment determined under IFRS?
A loss must be recognized if the book value exceeds the higher of the PRESENT VALUE of the future cash flows and the fair value less necessary costs to sell the equipment.
GAAP vs IFRS research and development costs?
Under GAAP all research and development costs are expensed as incurred. Under IFRS, research costs are expensed, but development costs are capitalized if the company believes that future economic benefits are probable and that the product being developed is commercially and technically feasible.
How are legal costs to successfully defend a patent treated under GAAP and IFRS?
Under GAAP the costs are added to the cost of the patent. Under IFRS the costs are expensed UNLESS the cost increase the future benefits to be derived from the asset.
How are biological assets valued under IFRS?
At fair value less costs to sell.
How is the reversal of an impairment loss recorded under IFRS?
The recovery of an impairment in value must be recognized if the circumstances that caused the impairment are reversed.
A company has two checking accounts: one with 100k and one with negative 10k. How are they reported under GAAP and IFRS?
Under GAAP the negative is reported as a liability, so the cash line will show 100k. Under IFRS they are netted so the cash line would show 90k.
In a period of rising prices, a company that wants to maximize profits will use what inventory method?
FIFO. In rising prices using FIFO, the earliest goods will be sold first which makes COGS lower and NI higher.
Formula for ending DV LIFO balance:
Beginning DV LIFO + (increase at base-year dollars)(price index)300,000 + (400,000 - 300,000)(1.1) = 410,000
What is the ceiling and floor of LCM?
Ceiling is Net Realizable Value and Floor is NRV less a normal profit margin.
Explain LCM
If replacement cost is within the range of the ceiling and floor, then market is replacement cost.If the RC is greater than the ceiling, then market is the ceiling amount.If RC is less than the floor, then market is limited to the floor amount.
How are trademarks classified, capitalized, amortized, and impaired?
They can be either definite or indefinite life, only expenditures made to external parties are capitalized, amortization depends on whether they are definite or indefinite life, as does impairment.
How are customer lists classified, capitalized, amortized, and impaired?
They can be either definite or indefinite life, only expenditures made to external parties are capitalized, they are amortized, impairment is decided by the recoverable cost test.
How is an initial franchise fee classified, capitalized, amortized, and impaired?
Can be definite or indefinite life, only capitalize expenses to external parties, amortization depends on definite or indefinite, as does impairment.
When a liability has a carrying value less than fair value, does an unrealized gain or loss exist?
An unrealized loss exists. It would be a debit to Impairment loss, and a credit to the liability to increase it to its fair value.
In financial statements prepared on the income-tax basis, how should nondeductible expenses such as meals be reported?
Included in the expense category in determination of income. These are still business expenses and need to be included to calculate income on the financial statements.
For grants, what is a prime factor in determining eligibility for accrual?
The expenditure of resources (spending the money)
What would an entity most likely do to hedge an investment in a foreign operation?
Borrow from another foreign entity with the same foreign currency as the operation being hedged. Since borrowing is a liability, any changes in the foreign currency would offset the investment.
If intercompany fixed asset balances are NOT eliminated, will consolidated income or loss be overstated.
Both can be overstated.
When there is NOT commercial substance to an exchange, gains are recognized:
In proportion to the amount of cash received.
Under the cost method, is the Sub’s income or dividends recognized by the parent?
Dividends are recognized as income to the parent.
When transferring a receivable, the loss is the difference between the carrying value of the portion of the asset transferred and the cash received for the:
Transferred portion. Usually the total carrying value will be allocated between the portion of the asset surrendered and portion retained, based on relative fair values.
For estimating income taxes for personal financial statements, assets and liabilities measured at their tax bases should be compared to assets and liabilities measured at their:
Estimated current value and estimated current amount.
Before assets are distributed as a property dividend, the unrecognized holding gain or loss is:
Recognized. If a firm pays a property dividend of a stock it bought for 20,000 when its market value is 25,000, there is a debit to retained earnings for 25,000 and a gain on disposal of 5,000 is recognized.
Bond prices and interest rates are inversely related. When interest rates increase,
the market value of bonds decrease, because there are now better opportunities on the market.
Are fund-based statements or government wide statements included on a CAFR?
They both are. The gov-wide statements focus on the financial results and health of the gov while the fund based statements report how various revenues are derived and spent.
What are the 3 columns on the gov-wide statements?
Gov activities, business type activities, and total gov activities
Which funds are not included in the gov-wide financial statements?
Fiduciary funds.
How is an internal service fund reported on the gov wide statements if another gov agency is its main beneficiary?
As a gov fund instead of a business type fund.
What accounting basis is used to report the gov wide financial statements?
Full accrual accounting.
What statements are required for the gov wide statements?
The statement of net position and the statement of activities
How would 5 year bonds appear in the fund based statements and the gov wide statements?
They wont show up in the fund based statements because they aren’t a claim against current assets. They will show up as a long term liability in the gov wide statements.
Does a firm selling put options on its own stock affect liabilities or equity?
It increases liability by the fair value of the options.The liability will be extinguished when the option is exercised or when it expires.
When computing avg shares outstanding during the year, how are stock dividends treated?
Stock dividends are treated as outstanding for the entire year. It is when new stock is issued that it is multiplied by the portion of the year remaining.
Is additional compensation to former shareholders after a business combination considered additional costs of the business combination?
No.
Can a forecasted transaction be hedged?
Yes- in a cash flow hedge since it is forecasted and therefore subject to changes in related cash flow.
Is a finder’s fee for a lease expensed or allocated over the lease term?
The finder’s fee benefits the entire lease term and is therefore expensed evenly over the lease term.
What exchange rate is used to TRANSLATE a foreign sub’s income statement?
The average exchange rate.
If a company changes from FIFO to weighted avg inventory during 2005, how is the cumulative effect of the change measured?
The change is measured as of the beginning of the year of change.
Are the direct costs or the general expenses in a business combination deducted from the corp’s net income from the combination?
Both are expensed in the period incurred.
Does the recording of an asset retirement obligation for a natural resources development site increase the liability or the depletion base?
Both. It is a credit to a liability, and a debit to the natural resources account, which is the depletion base.
Under international accounting, the vested portion of prior service cost is immediately recognized in:
Pension expense. The unvested portion is gradually recognized under delayed recognition in pension expense.
If financial statements prepared on another basis besides GAAP are not appropriately titled, the auditor must:
Disclose any reservations in an explanatory paragraph and qualify the opinion for the inappropriate title of the statements.
Under IFRS for SMEs, which inventory valuation method is NOT allowed?
LIFO.
Personal financial statements should report assets and liabilities at:
Estimated current values(fair values) at the date of the financial statements.
What financial statements are included in a set of personal financial statements?
A statement of financial condition (balance sheet) is always included, and a statement of changes in net worth may be included, but is NOT required.
In a personal statement of financial condition, a life insurance policy should be reported at cash surrender value less any:
Loans outstanding against the policy.
In a cash flow hedge, the item being hedged is measured using:
The present value of expected cash inflows or outflows. The item being hedged could be associated with an asset, a liability, or a forecasted transaction.
What is the purpose of reporting comprehensive income?
To summarize all changes in equity from nonowner sources.
What are the “other comprehensive income” items? (4)
Unrealized G/L on AFS securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.
Who pays the shipping with FOB shipping point?
The title passes to buyer at the shipping point, so the buyer is responsible for paying the shipping charges.
Who pays the shipping with FOB destination?
The seller pays shipping charges to get the goods to the buyer. The title passes to the buyer once they reach their destination.
Under IFRS, how should a company report their investments in bonds when it is a part of their business model to hold such investments solely to receive the cash and interest from principal repayment?
At amortized cost.
Can impairment losses on intangibles be reversed?
No. Losses on plant assets held for disposal can be reversed to the extent of previous losses but intangible impairment losses cannot be reversed.
Which governmental fund type can report a positive amount in the Unassigned fund balance?
The general fund. Other governmental funds cannot have a positive balance in their unassigned fund.
In a sale-leaseback, how is the gain on sale recognized?
It is amortized over the lease term. A 50,000 unearned gain on a sale-leaseback over 10 years will result in 5,000 being recognized in each of the 10 years.
If a city imposes a 2% tax on hotel charges which will be used to promote tourism in the city, what type of nonexchange transaction is this?
It is a Derived Tax Revenue.
How are the different governmental funds reported on the fund-based balance sheet?
The general fund has its own column, then the major funds each have their own column, and then the rest of the individual funds that are not considered major are grouped into a single column.
A fund balance is the amount of assets greater than liabilities. What are the different classes of the fund balance?
Unrestricted- which means it’s none of the below and is available for future use.Nonspendable and restricted. This means the money is restricted as to use by an outside party.Committed means the money is committed to a specific use by the highest level of decision making.Assigned means the money has been assigned by officials that are NOT the highest level of authority.
If a city plans on collecting $10k a month from property taxes for the next 18 months, how much revenue should be reported in year one?
$140,000. 10k for each month of the year plus Jan and Feb of the following year.
How is $10k of bonds reported on the gov wide and fund-based statements?
They are a regular liability on the gov wide statements and “other financing source” on the fund based statements.
How is a bond due in 3 months reported on the gov wide & fund-based statements?
It is ‘bonds payable’ on both.
If a city takes on a project but accepts no liability for the work being done, what type of fund is used.
An agency fund.
How does a transfer from the gen fund to capital projects get reported?
The general fund shows a “other financing use”, the capital projects fund shows a “other financing source”, and both balances will show up in the total gov funds column. This are no eliminations of “intercompany transactions”.
What is the difference between the purchases method and consumption method for the government fund accounting?
Under purchases, the whole purchase is immediately recognized as an expenditure. Under the consumption method, the supplies are moved to expenditures as they are used.
Is a computer or office supplies reported as an asset on the fund-based governmental statements?
Office supplies are an asset- capitalized assets such as a computer are not.
how is a capital lease recorded in the gov fund-based statements?
The PV of the payments is recorded as an expenditure, and an increase in ‘other financing sources’.
Do infrastructure assets get depreciated?
They do unless the modified approach is adopted. Then you have to set a minimum level of acceptable condition and maintain documentation to show that the asset is kept at that level.
For general purpose gov statements, is MD&A required?
Yes, it must be included but it is separate from both the gov wide & fund-based statements.
What are the 3 requirements to be a special purpose gov?
1) separately elected governing body. 2) It is legally independent so that it can sue, be sued, and buy and sell property in its own name. 3) Be fiscally independent of all other governments.
On the statement of activities, what is included in program revenues?
Any revenue generated by the activity, as well as any grants related specifically to that activity. This is then netted against the expense.
In troubled debt restructuring, what does the creditor do, and how do they recognize interest on the restructured loan?
They reduce the amount owed to the present value of future cash flows on the ORIGINAL interest rate. Then, they recognize interest by using the original interest rate times the BV of the new receivable. The debtor recognizes a loss as the difference between the current BV of its receivable and the present value of the future cash flows.
In troubled debt restructuring, what does the debtor do?
They compute the total cash flows now owed. So you take the future interest payments and add them to the new principal amount.
If you have an investment that isn’t enough to be equity method, then you invest more later that does take it to equity method, how is that treated?
The equity method is retroactively applied to the first amount. So if you owned 10% the whole year then bought another 20% at year end, you would recognize 10% of the company’s earnings under the equity method.
How is a capitalized interest problem done? (average accumulated expenditures)
First calculate the average accumulated expenditures. That is taking the amounts spent through the year each multiplied by the portion of the year remaining.Next you calculate avoidable interest. Avoidable interest is the interest on the construction specific loan(s), and then the amount of other debt above the amount of the construction loans.Then calculate actual interest. The lesser of the avoidable interest and the actual interest is the amount that can be capitalized.
When converting financial statements using translation, paid in capital accounts are translated using the ______ rate?
Historic rate in effect when the account arose or the investment was made.
If a firm buys land to build a warehouse on, is the interest from the land loan and the warehouse construction capitalized?
Only interest on the warehouse construction can be capitalized.
If a firm is going to discontinue a segment early next year, but there is a loss in that segment ending this year, how is that loss reported?
As an operating loss of the discontinued segment. This section is below income from continuing ops but above extraordinary items.
What is an accelerated filer and how long do they have after their fiscal year end to file their 10-K?
Aggregate worldwide market value of voting and nonvoting stock of $75 million or more, but less than 700 million. They have 75 days to file 10-K.
What is a large accelerated filer and how long do they have after their fiscal year end to file their 10-K?
Market cap of 700 million or more. They have 60 days to file their 10-K.
A foreign currency transaction is settled in ______ but measured and recorded on the US entity’s books in ________.
Non dollarsDollars.
Where are foreign currency exchange gains or losses on acc rec reported?
In current income as an item of income from continuing operations.
What disclosure is required relating to sinking funds and long term debt?
FAS 47 requires the disclosure of the aggregate amount of maturities and sinking fund requirements for all long-term debt for each of the five years following the balance sheet date. The detail of each year for both is shown.
When does a liquidating dividend occur?
When the investee pays more income than was earned during the period the investor owned the shares of the investee.
Describe the cost method:
The cost method is for an investment that DOES NOT give the investor significant influence. The dividends are recognized in income of the investor. The investment remains on the balance sheet at cost unless there is a permanent decline in value, or there is a liquidating dividend.
Under IFRS, are gains and losses on the changes in fair value of equity investments reported in the income statement or in other comprehensive income?
It can be either. If the investment is held for trading purposes, then the changes in fair value are reported in profit/loss.If it’s NOT held for trading, the investor may elect to report changes in fair value through other comp. income.
What type of investments can be transferred between categories under IFRS?
Only debt. Equity securities are not allowed to be transferred between categories under IFRS. When investments are transferred, prior period statements must be restated for comparative purposes.
Under IFRS, if debt securities are held NOT as part of the business plan, what are they measured at?
Fair value.
Under IFRS, if debt securities are held as part of the business plan, what are they measured at?
Amortized cost.
Under the equity method for GAAP, what effect does the sub’s income and dividends have on the investor’s investment account?
The investor’s share of income increases the investment account, and dividends decrease the investment account. The investor’s share of income from the investee is also recognized as income for the investor.
Which form of business combination results in a NEW legal entity?
Consolidation. In consolidation, 2 or more existing entities are combined into one new legal entity.In a merger, one pre-existing entity is combined into another pre-existing entity. In an acquisition, one entity acquires a controlling interest and both continue to exist as separate legal entities.
Accretion expense is essentially growth in the:
Asset retirement obligation.
Purchases of treasury stock do not affect retained earnings under the:
Cost method.
Return on equity is considered what kind of ratio?
A profitability ratio
What is the defensive-interval ratio and what type of ratio is it?
It is the ratio of quick assets to daily operating expenditures. It is a liquidity ratio.
Does the cost method or the fair value method require a reconciliation of the changes in carrying amounts between the beginning and end of a period?
They both require said reconciliation.
If a decline in inventory value is not considered temporary, the decline is recognized in the quarter in which the decline occurs. Later recoveries are:
Recognized as gains to the extent of the previous losses only.
A discount on a bond is essentially:
Extra interest expense.
Which regulation governs the form and content of financial statement disclosures?
Regulation S-X.
The notional amount in a derivative refers to:
The specified unit of measure. If you have an option to buy 100 shares, the notional amount is the 100 shares.
Where does a first time adopter of IFRS recognize the adjustments required to present its opening IFRS statement of financial position?
In retained earnings.
What are the 4 components of the IASB monitoring board? (1 on top, 3 on bottom)
The IFRS foundation is on top, and below it is the IFRS advisory council, the IASB, and the IFRS interpretation committee.
What does the IFRS foundation do and how long is their term?
They appoint members of the IASB, the IFRS Advisory Council, and the IFRS interpretations committee. The trustees serve 3 year terms
What are the objectives of the IFRS foundation? (4)
To develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards. To promote us and rigorous application of IFRS. To consider the needs of a range of size and type of entities. To promote and facilitate adoption of IFRS through convergence.
What does the IASB do?
They establish IFRS reporting standards, but they do NOT have enforcement power. Enforcement is the responsibility of the securities regulators in the national jurisdictions.
What is the IFRS advisory council and who appoints them?
They advise the IASB on priorities and the views of interested organizations. Members are appointed by the IFRS foundation
What does the IFRS interpretations committee do and who appoints the members?
They are similar to the FASB’s emerging issues task force: they identify issues in the context of IFRS, their interpretations are reviewed by the IASB. The members are appointed by the IFRS foundation.
What is an SME?
Small and medium-sized entities. IFRS has one single standard for companies that are not publicly traded. Revisions to SME standards only happen once every 3 years.
What are the 2 assumptions in the IASB framework?
That the accrual method is used, and that the entity is a going concern
What statements are required for a first-time adopter of IFRS?
Upon adoption, the first set of statements must have 3 statements of financial position, 2 statements of comprehensive income, two separate income statements, two statements of cash flows, and two statements of changes in equity. Basically they need 3 balance sheets and 2 of everything else.
What is the TRANSITION date of a company to IFRS?
The opening date of the balance sheet for the earliest comparative financial statements. If the first IFRS reporting date is as of Dec 31 Year 2, then the transition date will be Jan 1 year 1.
Upon first time adoption of IFRS, an entity can elect to use fair value as deemed cost for:
Any individual item of property, plant, and equipment.
What is the first reporting date when switching to IFRS?
The year end date for the period which IFRS is first applied.
What are the major characteristics of IFRS for SMEs?
Disclosures are simplified. LIFO is prohibited. Goodwill and indefinite life intangible assets are amortized over a period NOT exceeding 10 years. Depreciation is based on a component approach. Simplified temporary difference approach to income tax accounting. Reversal of impairment charges is allowed in some circumstances. No disclosures for earnings per share and segment disclosures.
Can revenue and AR from a sales commitment be recognized?
Yes. IFRS defines revenue from a balance sheet point of view and is based on the inflow of economic resources.
What is the difference in transfer of receivables under GAAP and IFRS?
GAAP focuses on whether control has shifted from the transferor to the transferee. IFRS focuses on whether the transferor has transferred the rights to receive cash flows from the receivable and whether or not substantially all the risk and rewards of ownership were transferred.
What is the general rule of IFRS when it comes to the value of assets?
That assets aren’t carried at more than their recoverable amount. If the asset’s carrying value is greater than the amount that could have been recovered through the asset’s use or by selling the asset, then it is impaired.
What is the definition of RECOVERABLE AMOUNT under IFRS?
The higher of the fair value less cost to sell or the value in use. Fair value less cost to sell is the amount obtainable from the sale in an arms-length transaction. The value in use is the discounted present value of the future cash flows expected from the asset.
What is a CGU under IFRS?
A cash generating unit is the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.
Does IFRS permit recovery of an impairment loss?
Yes.
Whats the difference in GAAP and IFRS of the reversal of an inventory write-down?
Under IFRS a reversal is allowed. Under GAAP it is NOT allowed.
How often is useful life and depreciation method reviewed under IFRS?
Annually. Under GAAP it’s only when events or circumstances change.
Component depreciation GAAP vs. IFRS
Under IFRS, when an item of PPE comprises of individual components for which different depreciation methods or rates are appropriate, each component is depreciated separately.
PPE revaluation GAAP vs IFRS
PPE can be remeasured to fair value if fair value can be reliably measured.
Where does an increase in PPE’s fair value ABOVE its original cost go under IFRS?
It goes into a revaluation surplus account which is in OCI. If a truck had gone down in value 10k then back up 15k in the next year, the first 10k would be in the profit and loss statements. The extra 5k would go into the revaluation surplus account in OCI.
What investment classifications exist under IFRS?
Held to maturity which is debt measured at amortized cost, and Fair value, all equity is at fair value.
Difference of HTM classification in GAAP vs IFRS:
Under GAAP the test is whether the firm has the positive ability and intent to hold to maturity. Under IFRS it’s the business model test, which evaluates if holding the debt for the cash flow is part of the business model.
Transfer from HTM differences GAAP vs IFRS
In GAAP you transfer from HTM when you no longer have the positive ability and intent to hold to maturity. Under IFRS you transfer from HTM only when the business model objective changes
OCI for investments differences in GAAP vs IFRS:
In GAAP gains/losses are recorded in OCI ONLY for AFS securities. In IFRS the entity may ELECT to records gains/losses to OCI at the initial measurement, but the election cannot be undone.
IFRS investment property
ljwoj
What is a small stock dividend?
Below 20 to 25 % of the previously outstanding shares.
What effect do stock dividends have on retained earnings?
If it is a SMALL dividend they reduce RE by the amount of shares issued X current stock price.If they are a LARGE dividend (bigger than 25%), they are recorded at par value.
JE for treasury stock purchase under cost method?
DR: Treasury stockCR: CashContributed capital is NOT affected. If treasury shares are resold at less than cost, then retained earnings is reduced by the difference in cost and reissue price.
In a fraud case, the CPA is generally liable to all:
reasonably foreseeable victims of the misstatement
Consideration must be:
legally sufficient. This doesn’t mean fair or equal.
A CPA can charge a contingent fee when helping a client with a claim for a refund filed solely:
in connection with a determination of statutory interest or penalties.
Ultramares rule:
established in a 1931 case of the same name, requires privity before an accountant is liable for negligence. Other rules, such as the Restatement rule, allow foreseeable users who rely on a negligently false statement to sue.
Sales contracts over $500 are governed by:
the statute of frauds. The UCC governs even the sale of a gumball
What is the one term that must be set for a UCC contract to be enforceable?
acceptance. Without acceptance it’s still just a negotiation
to be an enforceable written contract, what must the contract include?
the quantity of goods
under UCC when does risk of loss pass to buyer?
when the goods are delivered to the carrier
what does a principal have to do to terminate residual authority of one of its agents?
notify all thee agent’s known customers and publish the termination in appropriate trade journals
details of an output contract
when a customer agrees to buy all their materials from one supplier. courts decided that parties probably know about how much a supplier will order, so that is enough consideration to support a contract. If a contract cant be concluded within a year of its execution it must be supported by a signed writing under the statute of frauds
what can never be inferred?
quantity. price, subject matter, time for performance can all be inferred.
who has the responsibility in a check fraud scheme
the party in the best position to detect the loss- so usually the company the bad checks are coming from
If someone is going to transfer a check (order paper) to you, what two things do you need to make it valid?
Possession- meaning you need to actually have the check- and the person transferring it to you needs to have signed it.
Are punitive damages available in breaches of contract?
NO
what are reasonable grounds to OMIT an answer on a client’s tax return?
SSTS #2 says that only if both 1) the info isn’t readily available, and 2) the answer is not significant in terms of taxable income or loss
what is the hierarchy of paying of dividing up cash to creditors/IRS after a bankruptcy?
1.security interests are paid first2.child support and alimony3.admin costs such as attorneys and accountants who helped DURING the bankruptcy4. employee wages 3 MONTHS PRIOR5. contributions to benefit plans6. claims on raising or storage of grain7. consumer deposits8. all taxes are paid next9. unsecured creditors who filed in a timely fashion are paid pro rata and MUST BE FULLY REPAID before anything is paid to unsecured creditors who DID NOT file in a timely fashion
Usually, the first security interest to have priority will be the first one __________.But what is the exception dealing with purchase money?
Perfected.A purchase money security interest in NON-INVENTORY collateral has priority if it is perfected before the debtor takes possession or within 20 days thereafter.
what type of standard for tax shelters has the IRS adopted?
a “more likely than not” standard- meaning if the preparer thinks it is more likely than not that the position will be upheld- they don’t need to worry about the tax return preparer penalty
in a tenancy in common, the owners have the right to pass their interests to ________
their heirs through the estate
is a purchase price and a description of the property required to have a valid deed?
NO- you only need a description of the property
what is an example of a defect in the marketable title to real property?
an unrecorded easement
can incidental beneficiaries sue to enforce contracts?
no- the parties to the contract don’t have their benefit in mind when they create the contract
what is required for someone to file chapter 7 bankruptcy?
they must have debts- it can be any amount, as long as it is not an “abuse of the process”
Things to remember when looking at bankruptcy distribution problems:
1- Look at the dates! Priorities change based on the dates
claims with a “realistic possibility” of being sustained need not be:
disclosed. these are claims that have between a 33% and 50% chance of being sustained
can a surety compel the creditor to collect from the primary debtor or go after the debtor’s collateral?
no. the surety is primarily liable upon the debtor’s default, and they can’t compel the creditor to take either of these actions
2 ways intent can be established:
show that the defendant acted recklessly, or that the defendant knew of the misrepresentation
if a person is adjudicated incompetent by a court having proper jurisdictions- all future contracts entered into by this person are:
VOID
if a principal is either partially disclosed or undisclosed, is an agent personally liable for contracts entered into?
YES
Under the UCC secured transactions article, what will ALWAYS prevent a security interest from attaching?
failure of the debtor to have rights in the collateral
what entity handles ethical complaints that carry national implications
the AICPA
the 1933 securities act applies to sales of securities, including stocks, bonds and notes that are issued for periods over ___________
9 months
what is rule 505 of Regulation D of the 1933 securities act?
it allows a securities sale of up to 5mil in 12 months without registering with the SEC. it can only sell shares to a limit of 35 non-accredited investors but unlimited sales to accredited investors
what is rule 506 of reg D of the 1933 securities act?
Rule 506 merely requires that the securities not be advertised to the general public and not be sold to more than 35 non-accredited investors. Any type of security may qualify for this exemption, including stocks and debentures. There is no limit on the dollar value of the issue, so long as the other restrictions are complied with.
if you incorporate your business and you put all assets into the corp in exchange for stock, what % do you have to own immediately afterwards to qualify as tax free?
80%
in a non-liquidating distribution of property, how do you report the transaction?
the same as if you’d sold the property at its fair market value. If you had stock you bought for $10 per share, and you gave it to an owner of the corp when it was worth $20 per share, you’d report $10 of capital gains per share.
what are the tax implications to a corp and the individual if a corp has land that it bought for 20k but is now worth 25k, and the corp distributes it to an individual? (the corp still owes 10k on the land and the individual assumes the debt)
the corp would report a gain of 5k, and the individual reports a gain of 15k. the individual is 15k better off than before the transaction.
when you put property into a corp in exhange for stock, how is your basis in the stock determined?
it is your previous basis in the property plus any gain recognized on the property. if you had an asset you paid 100k for but is worth 150k when you transfer it, if the transfer qualifies as tax free you have basis of 100k in the stock. but if the transfer doesn’t qualify as tax free and you have a 50k gain on the transfer, then your basis in the stock is 150k.
if an individual transfers equipment into a new corporation with a basis of 100k but a FV of 150k and the transaction is tax free, what basis does the business take in the asset
100k. when you transfer property into a corp and end up with 80% or more of the stock, the tax basis is retained by both parties
when property is conveyed to an owner, whether as a liquidating distribution or not, it is recorded as:
as if it were sold for FMV. if it is a capital asset then there is a capital gain equal to the FMV less the basis.
if you have preferred and common shareholders, 270k in your profits and earnings account, and you pay 200k dividends to preferred shareholders and 100k dividends to common shareholders, how do they each report them?
preferred report 200k of dividends, and common shareholders report 70k of dividends and 30k of nontaxable return of basis. When corporate distributions exceed earnings and profits, the earnings and profits are first allocated to the distribution made to the preferred shareholders with any remainder to the common shareholders
what is section 1245 property?
personal decpreciable equipment used in a business. equipment and machinery fall into this category
what is section 1250 property?
1250 property includes business land and most real property that is subject to depreciation
how are taxes determined when a company is buying and selling its own stock?
it doesnt matter- a company buying and selling its own stock is nontaxable
what are capital assets for a corporation?
For a corporation, capital assets are normally limited to investments in stocks, bonds, and land (held in hopes of appreciation in value). Buildings, equipment, and inventory are bought to produce revenues and do not qualify as capital assets.
what are the threshholds and percentages for the dividends received deductions?
up to 20% ownership is 70%20-80% ownership is 80%above 80% is 100%
what is the dividend received deduction applied to?
the lower of the dividend amount or the overall income amount. if operations actually lost 20k but the dividend was 100k, the dividends deduction percentage would be applied to 80k
how do capital losses work for corporations?
they can be carried back 3 years and forward 5 years but they can only reduce other capital gains. they do not lower taxable income
what rate are capital gains for corporations taxed at?
the ordinary tax rate for the corp. it’s not a different rate like it is for individuals. when a net capital loss is either carried back or forward it is always treated as a short term loss
when a corp sells an asset, what would create ordinary income?
if an asset was bought for 50k, had dep exp of 10k, and was sold for 60k, 10k would be ordinary income and 10k would be a 1231 gain. the dep exp is recaptured through the sale.
are dividend-received deductions allowed for non-domestic companies?
NO. if you get dividends from a non domestic corp it’s all taxable
what time period are section 197 items amortized over?
15 years
how are incorporation fees expensed?
the first 5k can be deducted in the first year, the rest is amortized over 180 months
how are doubtful accounts treated for tax purposes?
the expense has to be incurred- meaning only the amount of accounts actually written off are able to be deducted
how are charitable deductions calculated for corporations?
the amount deducted in one year is up to 10% of income before any dividends received deductions. this means that you would take income plus dividend income and take 10% of that, then subtract the DRD afterwards. any amount over that can be carried forward for 5 years
a bad debt can only be deducted to the extent that:
it was included in income.Bad debt expense is actually the removal of a previously recognized income that was never received
what are the 3 elements of deductible business expenses?
ordinary, necessary, and reasonable in amount
what happens if a owner/employee is getting paid 300k and 50k of that is determined to be unreasonable compensation?
that 50k will then be taxed at a dividend but it also becomes NOT-deductible for the corp
how is inventory treated as a charitable donation?
when it’s donated, the deduction amount is the lower of cost or fair value
business gifts up to $____ per person can be deducted
$25
what is the half-year convention under MACRS?
According to the rules of MACRS, personal property is treated as placed in service or disposed of at the midpoint of the taxable year, resulting in a half-year of depreciation for the year in which the property is placed in service or disposed of by the company.
what is the tax treatment when there is a like-kind exchange with boot?
the amount taxed is the lesser of the boot received or the gain.
when a company owns 80% or more of another, when are gains reported for tax purposes?
not until the gain is realized by a sale to an outside party.
the benefit of using the installment sales method is removed by:
being added to taxable income as an adjustment
what constitutes a personal holding corporation?
more than half of the value of the outstanding stock must be owned by five or fewer individuals at some point during the last half of the year. at least 60 percent of its ordinary income must be generated by dividends, interest, rents, royalties, and other passive income
is interest income on state and federal government obligations included in taxable income?
interest from federal obligations IS taxable but interest from state obligations IS NOT taxable
which of these are included in the gross income of the recipient during a divorce: alimony, child support, and property settlement?
only alimony. alimony is included in the recipient’s gross income, but child support and property settlements are not
if someone is supposed to receive alimony and child support, but receives much less then they are supposed to during the year, how is it taxed?
the amount is applied to child support first. If they were supposed to get 5k during the year in child support and they received 6k total, 5k would be child support and 1k would be alimony.
how is the exclusion ratio computed on an annuity contract?
you take the basis over the amount expected to be received, and then multiply that percentage by the total of the payments received that year. so if you paid 50k for an annuity and it was estimated that you would be paid out a total of 100k, your exclusion ratio is 50%
what are the types of capital assets for individuals?
Capital assets for individual taxpayers are personal property, such as household furniture and tools, and investment property, such as real estate and securities such as stocks and bonds.
how are gains and losses handled on personal and investment property for individuals?
Taxpayers must report gains and losses on investment property (such as their investment stocks and bonds) but only gains on personal property are reported. For example, if a taxpayer sells personal furniture at a gain, that capital gain must be reported. However, if the same personal property is sold at a loss, no deduction is allowed.
how are short and long term capital gains and losses treated by an individual?
the first step is to net the short term gain and loss and the long-term gain and loss.Then, you net the two together. A net capital loss of up to $3k can be deducted in any year in arriving at AGI, and any loss over that can be carried forward indefinitely.Also, when netting the overal gains and losses together, whatever is bigger determines whether it’s a long term or short term
how are gains/losses treated in related party transactions on the individual level?
gains are taxed but losses are not deductible
how much capital losses can someone filing “married filing separately” deduct in a given year?
this filing status can only deduct $1,500 instead of the regular 3,000
what is the treatment of non business bad debt?
the principal is written off in the year the loan is deemed worthless and it is considered short-term. any foregone interest is not deductible
how is basis determined when a gift is given?
it’s the basis of the gift in the hands of the gift-giver
if you inherit stock worth 10k, how much tax do you owe?
assets that are inherited aren’t taxable. You take a basis in them that’s the same as the fair value on the date of death.
how are qualified dividends taxed?
Qualified dividends are those dividends collected from a U.S. domestic corporation or a qualified foreign corporation. To encourage investments in these companies, the dividends are taxed at the same reduced rate that applies to long-term capital gains.
how is a like-kind exchange taxed when no cash is received?
the basis of the new asset is the same as the basis in the asset given up plus any cash paid, and no gain or loss is recognized
how is a trade that is not like-kind treated for tax purposes?
your basis in the new asset is its fair market value, and you subtract the basis in the asset you traded and that difference is your gain
if cash is received in a like-kind exchange what is the tax consequence?
a gain is recognized on whatever is the lower of the cash received or the gain on the exchange. If there was 5k received and the gain was only 3k, then a 3k gain is recognized. if the gain was 5k and cash received was 2k, then a gain of 2k is recognized
what is the rule on excluding a gain on the sale of a primary residence?
If certain rules are met, a couple filing a joint return can exclude up to $500,000 of the gain on their personal residence. The structure had to be their principal residence for at least two of the most recent five years. This exclusion cannot be taken in two consecutive years.
what are the rules for a C corp to use the cash basis of accounting?
c corps cant use the cash method unless their average annual gross receipts for the previous three years do not exceed 5 million. once they pass 5 million they must use accrual method for all future years
can partnerships use the cash basis of accounting?
yes, as long as none of the partners are a c corp. and there are no income limits for the cash basis
characteristics of ORDINARY ASSETS?
accounts and notes receivableinventorytrade or business assets OWNED FOR A YEAR OR LESS
characteristics of 1231 assets?
Trade or business assets owned for MORE than a year
if you inherit property and the donor’s basis is higher than FMV, how is it treated when you sell the asset for tax purposes?
You assume the lower FMV as your basis for computing losses, and you use the donor’s higher basis for computing gainsIf you sell it at a price in between the gain and loss basis, no gain or loss is recognized
If you inherit stock and sell it within a year is it a short-term or long-term gain?
You assume the holding period of the donor. So if they had only had it 6 months you start at 6 months when you inherit it- if they had it 5 years and you sell it the day after you inherit it, it is still a long-term gain
when the alternate valuation date is elected after a death, what is the basis for the property distributed?
it is the fair market value on the date that is six months after the date of death
if you (an individual) have ST cap losses of 10k and LT cap losses of 10k how much can you deduct of each one in the current year?
3k can be deducted, and the ST losses are deducted first.
in an involuntary conversion, how do you calculate any gain or loss?
the taxable gain is the LOWER of the actual gain on the transaction or the money left over after the replacement
what is the basic hobby loss rule?
you have to make a profit in 3 out of the most recent 5 years. so 3 years of losses in a row means you’re engaged in a hobby not a business.expenses related to a hobby are deductible only to the extent of revenues earned
how are benefits under cafeteria plans taxed?
they are only taxable if they are received in cash
what is the exception to the rule of stock dividends being non-taxable?
if the investor can choose between cash or a stock dividend, then it’s taxable.If some owners are given common stock but some are given preferred stock, then it’s taxable to all.
how are gambling gains/losses treated for tax purposes?
Winnings from gambling activities are reported within the income of the taxpayer. Losses are shown as miscellaneous itemized deductions. However, the losses deducted cannot exceed the amount of gambling winnings being reported
is interest on United States treasury bonds taxable?
nterest revenue on United States treasury bonds is taxable on a federal income tax tax return. Interest revenue on US Series EE bonds is tax exempt but only when it meets specific rules: the bonds must have been purchased by the taxpayer who was over 24 years old and the proceeds must be used to pay college costs for taxpayer, spouse or a dependent. Interest revenue on state and municipal bonds are always tax free on a federal return.
how are passive activity losses treated on an individual tax return?
Passive activity losses are not deductible on an individual income tax return. They are carried over and used to offset passive income in the future until used up. A passive activity is a business in which the taxpayer serves as an owner but does not materially participate in the operation. Rental activities and limited partnerships are also included in this category, regardless of the owner’s participation.
what is the loss deductibility exception dealing with losses from rental activity?
passive losses on rental activities are deductible up to $25,000 as long as the owner is an active participant in the management. The deductibility of this $25,000 is lost gradually if the taxpayer’s income is especially high. Passive losses are carried forward indefinitely so that they can reduce future passive activity gains.
if a taxpayer has a reasonably high income level but they get social security benefits, what percent of the SS is taxable?
usually 85%. So 85% of the SS benefits received would be included in taxable income
what can cause a scholarship to be considered earned income?
if the recipient has to work as a requirement of the scholarship, such as teaching 2 classes a week
If a couple separates and the husband gives the wife 5k before a legal separation decree is in place how is the 5k taxed?
It is not yet alimony so it is not taxable to the woman.
If you have rental homes can you deduct charitable contributions from the rental revenue?
No. You would have your rental revenue and expenses on a schedule E of a 1040 and a charitable contribution isn’t a necessary expense of maintaining rental properties. But, you could include the charity as an itemized deduction on the schedule A of a 1040.
how are social security benefits taxed in the income is relatively low?
SS benefits are not taxed if the income is low. 50% becomes taxable if the income is higher, and up to 85% can be taxable if the income level is relatively high
are cash gifts included in taxable income?
no- cash received as a gift is not included in federal taxable income, although in some situations a gift tax may apply
what is the number of days per year that determines whether a property is treated as a rental or not?
15 days. If a property is rented for less than 15 days, no rental income is includable and expenses attributable to the rental are not deductible. The property taxes are still deductible in full on Schedule A
how are dividends on a life insurance policy treated for tax purpose?
they are not taxable. They are viewed as deduction in the expense of the policy
what are the requirements for EE bond interest to be tax free?
the bonds must be issued after December 31, 1989, be purchased by the sole (or joint owner) and the buyer must be at least 24 years old when bonds are purchased. The proceeds of the bonds must be used to pay the higher education tuition and fees for taxpayer, spouse, or dependent.
how are a C corp’s net capital losses used?
deducted from the corp’s ordinary income up to 3k, then carried back 3 years and forward 5 years
what is the maximum deduction in one year for a section 1244 loss?
50,000- 100k if filing jointly
