F1 Flashcards
(110 cards)
1
Q
What’s SEC stand for?
A
Security Exchange Commission : The SEC was established by the security exchange act of 1934
2
Q
CAP?
A
Committee on Accounting Procedure: 1939-1959: a part-time committee of the AICPA that promulgated Accounting Research Bulletin (ARB) which determined GAAP from 1939-1959
3
Q
AICPA ?
A
American Institute of Certified Public Accountant
4
Q
APB?
A
Accounting Principle Board: Part-time committee of AICPA . It issued Accounting Principle Board Opinion and APB interpretation, which determined GAAP from 1959-1973
5
Q
FASB?
A
Financial Accounting Standard Board: In 1973, independent full-time organization. FASB has 7 full-time members who may served two 5-years terms.
6
Q
When did FASB Accounting Standards Codification become the single source of nongovernmental U.S GAAP?
A
July 1,2009
7
Q
What are the authoritative literature included in the Codification ? Hint: FEDPRIA
A
1- FASB 2- Emerging Issues Task Force Abstract and Topic D 3- Derivative Implementation Group issues 4- APBO 5- Accounting Research Bulletins 6- Accounting Interpretation 7- AICPA
8
Q
What is IASB?
A
International Accounting Standard Board: was established in 2001. The purpose of IASB is to develop a single set of high qualit, global accounting standards.
9
Q
IFRIC?
A
International Financial Reporting Interpretations Committee: is appointed by IFRS Foundation to assist the IASB. Th IFRIC provides guidance on newly identified financial reporting issues not adressed in the IFRSs and assists the IASB in achieving international convergence of accounting standards.
10
Q
What are the fundamental Qualitative characteristics of useful information ?
A
Relevance and faithful
11
Q
What is Relevance? Passing Confirms Money!
A
Financial Information is relevant if it is capable of making a difference in the decision made by users: Predictive Value Confirming Value Materiality: an omission or misstatement of the info
12
Q
Faithful Representation(Reliable)?
A
Reliable Faithful Representation Completely neutral is free from error: Completeness : Neutrality Free from error
13
Q
Enhancing Qualitative Characteristics? Compare and verify in time to understand
A
Comparability consistency Verifiability Timeliness Understandability
14
Q
How do we measure Assets and liability?
A
Variety of ways: Historical cost: pp&e Current cost: inventory Net realizable value: a/r Current market value: marketable securities Present value of future cash flow: long term debt “bond”
15
Q
What are the fundamental assumption of us GAAP ?
A
Entity assumptions Going concern assumption Monetary unit assumption Periodicity assumption : year; quarter … Historical cost principle Revenue recognition principle Matching principle Accrual accounting Full disclosure: footnote”completeness “ Conservatism principle : recognize revenue/ gain when earning process complete & recognize exp or losses immediately
16
Q
What are the fundamental assumption of IFRS?
A
Only two: Accrual basis accounting Going concern
17
Q
What are the criterias for liability recognition associated with exit or disposal activities?
A
When all criterias are met: An obligating event has occurred The event result in a present obligation to transfer asset or to provide services in the future. And The entity has little or no discretion to avoid the future transfer of asset or providing service
18
Q
Cost Constraint?
A
The cost constraint is a pervasive constraint on the info. provided in financial reporting. The benefit of reporting financial info. must be greater than the cost of obtaining and presenting the info.
19
Q
SFAC No. 5?
A
Recognition and Measurement in the Financial Statements: This stmts sets forth the recognition criteria and guidance on what and when info. should be incorporated in the financial stmts.
20
Q
Measurement Attributes for Assets and Liabilities?
A
a. Historical cost: PP&E
21
Q
Revenue Recognition Principle?
A
As a general rule, revenue should be recognized when it is earned and when it is realized or realizable:
22
Q
Matching principle?
A
All expenses incurred to generate a specific amount of revenue in a period are MATCHED against that revenue.
23
Q
Conservatism Principle?
A
If in doubt when selecting from alternative GAAP methods, the method that is least likely to overstate assets(and revenues/gains) and understate liabilities(and expenses/losses) in the current period should be selected:
24
Q
SFAC No. 6?
A
Elements of Financial Statements( REGL ALE needs ID):
25
Five Elements of Present Value Measurement? (UVOTE)
1. The price for bearing (U)ncertainty
26
Income statement? REGL AILE need ID
The purpose of the income statement is to provide info. about the uses of funds in the income process(i.e. exp), the uses of fund that will never be used to earn income(i.e. losses), the sources of funds created by those expenses(i.e. revenues), and the sources of funds not associated with the earnings process(i.e. gains).
27
Uses of the income statement?
The income stmt is useful in determining profitability, value for investment purposes, and credit worthiness.
28
Gross concept?
1. Revenues are reported at their gross amounts, less allowance for returns and discounts given
29
Net concept?
1. Gains are reported at their net amounts
30
Major components of an income and retained earnings statement? IDEA
1. Income(or loss) from continuing operations: operating activities(i.e., revenues, costs of goods sold, selling exps, admin exps), non-operating activities(i.e., other revenues and exps and losses), and income taxes.
31
Multiple step income statement?
The multiple step income stmt reports operating revenues and expenses separately from non operating revenues and expenses and other gains and losses. The benefit of the multiple step income stmt is enhanced user info.
32
Normal operating?
Net sales - Cost of sale= Gross margin - selling expenses - general & admin expenses - Depreciation exp = Income(loss) from operations.
33
Non-operating? other revenues and gains
Interest income + gain on sale of fixed asset + other income - other expenses and losses: interest expense, loss on sale of fixed assets = income before unsual items and income tax
34
Inventory cost?
Inventory cost = purchase price + freight in
35
Selling expense?
Selling expenses = Freight out + salaries and commissions + advertising
36
General & Administrative?
General & Admin = Officer's salaries + accounting and legal + insurance
37
Non-operating ?
Non-operating = Auxiliary activities, interest expense
38
Single step income statement?
In the single step income stmt presentation of income from continuing operations, total expenses(including income tax expenses) are subtracted from total revenues. Benefit of single step income stmt are its simple design and the fact that the presentation of types of revenues and exps do not appear to the user to be classified as more important than others.
39
Discontinued operations?
The (normally) loss from discontinued operations can consist of an impairment loss, a gain/loss from actual operations, and gain/loss on disposal. All of these amounts are included in discontinued operations in the period in which they occur.
40
Component of an Entity?
1. U.S. GAAP: An operating segment, A reportable segment, a reporting unit, a subsidiary or An asset group
41
Held for Sale?
Under both U.S. GAAP and IFRS, a component of a business is classified as " held for sale" in the period in which ALL of the following criteria are met:
42
Types of Entities to be considered Discontinued operation?
1. Has been disposed of or
43
Example: The Golf division of All Sport company is lossing $200,000 per month. The board of directors decides on April 30, year 1 to dispose of the Golf division. On April 30, year 1 the carrying value of the division is $4,000,000 and its FV less costs to sell is $ 2,200,000. After months of negotiations, the division's net asset are sold on June 30, year 2 for $2,000,000. Income tax rate is 40%
Reporting for Year 1:
44
Presentation and Disclosure of Discontinued operation
1. Presentation: the results of discontinued operations, net of tax, are reported as a separate component of income before extraordinary items.
45
Exit and Disposal Costs
1. Involuntary employee termination benefits
46
(Obligating Event Occur with no discretion to avoid the future)
A liability associated with an exit or disposal activity should be recognized only when ALL of the following criteria are met:
47
Liability measurement for Exit and Disposal Activity
The liability associated with Exit and Disposal Activity should be measured at Fair Value
48
Income Statement Presentation and Disclosure
1. Costs associated with an exit or disposal activity related to a discontinued operation will be reported in Discontinued operations. Costs associated with an exit or disposal activity not related to a discontinued operation will be reported in income from continuing operations
49
Extraordinary items?
Under U.S. GAAP, extraordinary items are:
50
Example of Extraordinary items
1. The abandonment of , or damage to, a plant due to an infrequent earthquake or an infrequent flood
51
Example of Non-extraordinary items
1. Gain or loss from sale or abandonment of property, plant, equipment used in the business
52
Material unusual or infrequent items
Reported as a separate line item as part of income from continuing operations(not net of tax)
53
What are the 3 classifications of Accounting Changes?
1. Change in accounting estimate
54
Events Resulting in change in accounting estimate
1. Changes in the lives of fixed assets
55
How to report a change in accounting estimate?
Prospectively: changes in accounting estimate are accounted for prospectively. They do not affect previous periods
56
Changes in Accounting principle(Retrospective application)?
A change in accounting from one accounting principle to another acceptable accounting principle(GAAP to GAAP or IFRS to IFRS)
57
Cumulative effect of changes in accounting principle?
1. If non-comparative(i.e. only one period available) financial stmts are being presented, then the cumulative effect of a change in accounting principle = the difference between the amount of beginning RE in the period of change and what the RE would have been if the accounting change had been retroactively applied to all prior affected periods.
58
General Rule of Reporting Changes in accounting principle:
The general rule is that changes in accounting principle should be recognized by adjusting beginning RE in the earliest period presented for the cumulative affect of the change and if prior period financial stmts are presented, they should be restated(retrospective application).
59
Exceptions to the General rule of changes in an accounting principle
1. Impracticable to Estimate: if it is considered"impractical" to accurately calculate this cumulative effect adjustment, then the change is handled Prospectively(like change in estimate). E.g. Change in inventory cost flow assumption to LIFO.
60
Changes in accounting Entity(retrospective application)
Examples: consolidated or combined financial stmts that are presented in place of stmts of the individual companies and changes in the companies included in the consolidatd or combined financial stmts from year to year.
61
Presentation &Disclosure of changes in accounting Entity
1. Restatement to reflect information for the new entity(retrospective application)
62
Error correction(Prior period adjustment)
Error corrections include:
63
Effect of Error correction
1. comparative Financial stmts presented:
64
Comprehensive Income
Comprehensive income is the change in equity(net assets) of a business enterprise during a period from transactions and other events and circumstances from a non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
65
How to calculate Comprehensive Income?
Net income + OCI = Comprehensive income
66
PUFER
P ension Adjustments
67
2 ways to Present Comprehensive Income:
1. Single-statement approach
68
Required disclosures of Comprehensive income
All formats must disclose:
69
Summary of significant accounting policies in notes to financial statements
Both U.S. GAAP and IFRS requires that a description of all significant policies be included as an integral part of the financial statements.The prefered presentation is to include the "Summary of Significant Accounting Policies" as the first or second note to the financial stmts. Policies presented in other notes should not be duplicated.
70
Identify and describe
a. Measurement bases used in preparing the financial stmts
71
Accounting policies commonly described in footnote(core of footnote)
1. Basis of consolidation
72
Defined Related Parties?
Related parties include:
73
Examples of Related party Transactions
1. Sales, purchases and transfers of real or personal property
74
INTERIM FINANCIAL REPORTING
Interim financial reporting is generally concerned with the quarterly reports that public companies must file with the SEC. Generally accepted accounting principles that were used in the most recent annual report of an enterprise should be applied to interim financial statements of the current year, unless a change in accounting principle is adopted in the current year.
75
INTERIM FINANCIAL REPORTING - TIMELINESS OVER RELIABILITY
For interim reporting only, timeliness is emphasized over reliability.
76
INTERIM FINANCIAL REPORTING - An integral part of the annual financial stmts.
Interim financial stmts must be viewed as an integral part of the annual financial stmts. Because interim financial stmts generally are not audited, each stmt presented should be marked "unaudited."
77
Minimum Presentation for interim reporting (U.S.GAAP)
U.S.GAAP does not establish presentation minimums for interim reporting, although guidance is provided by the SEC.
78
Minimum Presentation requirement for interim reporting under IFRS
1. Condensed BS(stmts of financial position) as of the end of the current interim period and as of the end of the immediately preceding financial year
79
Segment Reporting - REQUIRED DISCLOSURES FOR ALL PUBLIC ENTERPRISES(4)
In order to conform with GAAP, financial statements for public business enterprises must report segment information about a company's:
80
Segment Reporting - USE SAME ACCOUNTING PRINCIPLES AS MAIN FINANCIAL STATEMENTS
The required financial statement information is essentially a disaggregation of the entity's regular financial statements. The accounting principles used in preparing the financial statements should be used for the segment information. Segment information presented must be reconciled to the related aggregate amounts in the financial statements.
81
Segment Reporting - INTERCOMPANY TRANSACTIONS NOT ELIMINATED FOR REPORTING
It is important to remember that transactions between the segments of an enterprise are not eliminated as in consolidation between the parent company and subsidiaries.
82
Segment Reporting - SCOPE (PUBLIC COMPANIES ONLY)
Segment reporting applies to public companies only. It does not apply to not-for-profit organizations, nonpublic companies, or separate financial statements of members of a consolidated group if both the separate company statements and the consolidated or combined financial statements are included in the same financial report.
83
OPERATING SEGMENT'S DEFINITION (3)
i) That engages in business activities from which it may earn rev.s and incur exp.s (including rev.s and exp.s relating to trans. with other components of the same enterprise),
84
NOT EVERY ENTERPRISE IS AN OPERATING SEGMENT(2)
1.Corporate Headquarters Not an Operating Segment A corporate headquarters or certain functional departments may not earn revenues or may earn revenues that are only incidental to the activities of the enterprise and would, therefore, not be operating segments.
85
Segments may be aggregated if: (3)
(i) aggregation is consistent with the objective and principles of segment reporting, (ii) the segments have similar economic characteristics, and (iii) the segments are similar in:
86
QUANTITATIVE THRESHOLDS FOR REPORTABLE SEGMENTS
1. 10% rule
87
10% rule "Size test" (3)
1. A segment meets the size test if its reported revenue(internal +external customer), is 10% or more of the total combined revenue.
88
75% "Reporting Sufficiency" Test
If the total of external (consolidated) revenue reported by operating segments constitutes less than 75% of external (consolidated) revenue, additional operating segments need to be identified as reportable segments, even if they do not meet the above three tests, until at least 75% of external (consolidated) revenue is included in above three tests, until at least 75% of external (consolidated) revenue is included in reportable segments. The practical limit to the number of segments is 10, which is not a precise limit.
89
90% "Single Industry Dominance" Test
There is no requirement to report any segment if a single segment accounts for 90% or more of the following combined amounts for all segments:
90
SEGMENT PROFIT (OR LOSS) DEFINED
Revenues
91
Items Normally Excluded from Segment Profit (or Loss) (8)
a. General corporate revenues
92
Change to the FIFO method from LIFO method: effect as of the beginning of the year.
Accounting principle change (retrospective application effect on retained earnings)
93
Settlement of material litigation.
Income from continuing operations.Settlement of material litigation is to be reported in the income from continuing operations section of the income statement, as although it is likely an infrequent event, it is not considered unusual in nature.
94
Prohibition of a product line by the government.
Extraordinary items: A prohibition of a product line by the government would be deemed an extraordinary event in a business under U.S. GAAP as it is certainly unusual in nature and happens infrequently. Note that IFRS prohibits the recognition of gains and losses as extraordinary.
95
Material gain on the sale of a factory building
Income from continuing operations: While a material gain on the sale of a factory building is a rather infrequent event, it is not considered unusual in nature for a company to have this type of transaction; therefore, it is reported in the income from continuing operations section of the income statement.
96
Change from double-declining balance to straight-line method of depreciation in first quarter: current year's effect.
Income from continuing operations: A change from the double-declining balance method of depreciation to the straight-line method of depreciation is a change in accounting estimate effected by a change in accounting principle. This type of change is reported prospectively, and all activity is reported through income form continuing operations. There is no separate or special reporting of the effect of the change. The change in method is simply implemented, and the depreciation under the straight-line method is reported as expense in income from continuing operations for the first quarter.
97
Operations of a segment deemed "held for sale."
Discontinued operations: The results of operations of a component of an entity will be reported in the discontinued operations section of the income statement if the component is deemed to have met all criteria for the "held for sale" classification.
98
Loss from a major strike by employees.
Income from continuing operations
99
Revenue from a cancelled product line in women's clothing.
Income from continuing operations: In order for information to be presented as a component of discontinued operations in the income statement, it must be information for a qualifying component of the business, which is the lowest level for which operations and cash flows can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the entity. A dress line in women's clothing would not qualify as a component; therefore, the revenue from the discontinued dress line would be reported in the income from continuing operations section of the income statement.
100
Material flood damage to a building located in a flood plain that floods every two years.
Income from continuing operations:Material flood damage to a building that is located in a flood plain that floods every two years is not considered an infrequent or unusual event; therefore, the loss is reported in the income from continuing operations section of the income statement.
101
Change in the estimated service life of an asset.
Income from continuing operations: A change in the service life of an asset is a change in estimate, which is implemented in the current year and reported in the income from continuing operations section of the income statement.
102
Extinguishment of a long-term debt(common management strategy for borrowing purposes).
Income from continuing operations:
103
Destruction of a warehouse by an earthquake in Wisconsin(a state that rarely has earthquakes)
Extraordinary items: The occurrence of an earthquake in Wisconsin in an unusual and infrequent event (as this state rarely experiences earthquakes); therefore, the loss from destruction of a warehouse (likely material) is reported in the extraordinary items section of the income statement (not permitted under IFRS).
104
Material write-down of inventory.
Income from continuing operations:
105
Loss on the sale of a subsidiary.
Discontinued operations
106
Dawg Corp. changed its inventory valuation method from FIFO to LIFO to more fairly reflect the cost flow of goods
Change in Accounting Principle, Prospective: A change from FIFO to LIFO is a change in accounting principle that is accounted for prospectively, like a change in accounting estimate because it is too difficult to calculate the cumulative effect of the change.
107
Duck Company changed from the income tax basis of accounting to the full accrual basis of accounting, as required by its bank in order to obtain financing.
Correction of an Accounting Error, Restate Prior Periods: The income tax basis of accounting is a non-GAAP method. A change from a non-GAAP method of accounting to a GAAP method of accounting is considered to be an error correction under GAAP. An error correction is accounted for by restating all prior periods presented and adjusting the beginning retained earnings of the earliest period presented.
108
Gosling, LLC was acquired by Goose International. Goose presents consolidated financial statements.
Change in Accounting Entity, Retrospective: A change in accounting entity occurs when an entity has changed composition as a result of consolidation or a business combination. When Goose presents it consolidated financial statements that include Gosling, it will restate any prior period financial statements presented for comparative purposes to also reflect the consolidation of Gosling. Under U.S. GAAP, this restatement is referred to as a retrospective adjustment.
109
Build Big, Inc., a construction company, decided to improve shareholder return and stimulate the company's stock price by changing its method of accounting for long term contracts from the completed contract method to the percentage of completion method.
Not an Acceptable Change in Accounting, No Change: While the change in reporting construction contracts is a change in accounting principle, an accounting principle may be changed only if required by GAAP or if the alternative is preferable and more fairly presents the information. A change in accounting principle is not acceptable if it done in order increase earnings and the stock price of the company.
110
The final judgement on a lawsuit is decided in the current year against Big Trouble, Inc. The amount is significantly greater than previously thought. The company properly accrued $1 million as a liability on their previous financial stmt. The final judgment is for $15 million.
Change in Accounting Estimate, Prospective: Since the company booked a liability in the previous year based on the best information available at the time, the subsequent settlement is accounted for prospectively as a change in accounting estimate. Previous financial statements are not restated.
