F2

Question 1

Formula for recognizing G/L on long-term construction contracts over time.

Answer 1

(total cost to date/total cost of contract) x total estimated gross profit - gross profit recognized to date

Question 2

Consignment arrangement

Answer 2

Dealer/distributor is tasked by entity to sell products to customer

Question 3

Refund liability

Answer 3

book amount that is expected to returned while buyer has the right to return

Question 4

Financing agreement

Answer 4

the repurchase price is more than the expected market value of the asset; type of put option;

selling price > repurchase > FMV

put option: entity has obligation to repurchase the asset at the customer’s request for less than the original selling price

Question 5

JE for revenue recognized at a point in time (cost & billings)

Long-term construction contract

Answer 5

Record costs: Dr. construction in progress; Cr. material, cash, etc.
Record billings: Dr. A/R; Cr. Progress billings

Question 6

JE for revenue recognized over time (estimated GP)

Answer 6

Record estimated GP: Dr. cost of LT construction projects, construction in progress; cr. revenue from LT construction contracts

Question 7

JE for revenue recognized over time (close construction accounts)

Answer 7

Dr. Progress billings; cr. construction in progress

Question 8

JE for revenue recognized at a point in time (close construction accounts)

D

Answer 8

Dr. progress billings; Cr. Revenue
Dr. Cost of LT construction contract; Cr. Construction in progress

Question 9

Construction in progress account vs. progress billings

Answer 9

current asset vs. contra-asset

Question 10

Types of repurchase agreements

Answer 10

Forward: Must
Call: Can
Put: obligation at customer’s request

less than selling price = lease; greater than or equal to = financing

Question 11

Tx: change in accounting estimate

Answer 11

prospective application (no prior adjustment)

ex: useful life

Question 12

Tx: change in accounting principle that is inseperable from change in estimate

Answer 12

accounted for as a change in estimate (prospective)

ex: change in depreciation method

Question 13

Tx: change in accounting principle

Answer 13

retrospective application (cummulative effect adj to beg. RE net of tax)

exceptions: impractal, FIFO-LIFO

Question 14

Tx: change in accounting entity

Answer 14

retrospective: statement of prior years for comparison

Question 15

Error correction

Answer 15

prior period adjustment

Question 16

FOB Shipping

Answer 16

Risks of ownership pass to the buyer upon delivery to a common carrier under FOB shipping point

Question 17

The summary of significant accounting policies includes disclosures of

Answer 17

1. measurement bases used in preparing FS
2. Specific accounting principles and methods used during the year
   * Basis of consolidation
   * Depreciation methods
   * Ammortization of intangibles
   * Inventory pricing
   * Use of estimates
   * Fiscal year definition
   * Special revenue recognition issues (long-term contracts, franchising, leasing, etc.)

Question 18

How should cash for LT liabilities be reported?

Answer 18

long-term asset, tied with intended restriction

Question 19

How are bonds held to maturity reported?

Answer 19

amortized cost (not FV)

Question 20

Fair value hierarchy

Answer 20

1. QUOTED observable, active, identical (ex: stock price on NYSE)
2. OBSERVABLE similar in active market or identical in not active (ex: municipal bonds)
3. UNOBSERVABLE inputs (estimates); biased, least reliable

Question 21

Reporting loss contingencies

Answer 21

“probable and reasonably estimable”

Question 22

Subsequent events

Answer 22

occurs after BS date; 2 categories (recognized & unrecognized)

Question 23

Recognized subseqent event (type 1)

Answer 23

provides info about conditions as of BS date (recognized in FS); ex: settlement of litigation, large customer banruptcy

Question 24

Unrecognized subsequent event (type 2)

Answer 24

provides informtion about conditition that did not exist as of BS date (not regnized in FS; potentially disclosed); ex: business combo, natural disaster

Question 25

Subsequent period evaluation period

Answer 25

Public: evaluate through the date the FS are issued Private: evaluate through the date that the FS are available to be issued

Question 26

Subseqeunt events: Reissue FS

Answer 26

do not recongize additional events unless required by GAAP

Question 27

Subsequent events: Revised FS

Answer 27

(considered reissued); do not dislose revision for SEC filer, disclose dates for non-SEC filer

Question 28

Fair value valuation techniques

Answer 28

1. Market approach: use prices from market 2. Income approach: discount future CF 3. Cost approach: use current replacement cost ## Footnote (MIC); change in technique = change in estimate (prospective tx)

Question 29

Fair value disclosures

Answer 29

valuation technique and inputs, uncertainties in FV, and how changes could affect entity

Question 30

Fair value

Answer 30

(EXIT) price to sell an asset in principal (or most advantageous market) ## Footnote principal: market with greatest volume (reporting entity must have access) advantageous: best prices after considering transaction costs

Question 31

Fair value for non-financial assets | i.e. land

Answer 31

highest and best use: highest economic benefit

Question 32

Ratio analysis numerator/denominator relationship

Answer 32

numerator: direct relationship denominator: inverse relationship

Question 33

Profitability ratios

Answer 33

GP margin= (Net sales-COGS)/Net sales Profit margn= NI/NS Return on sales= EBIT/NS ROA= NI/Avg. assets Dupot ROA= profit margin x asset turnover Return on equity = NI/avg. total equity Op. CF= CF from op./current liabilities ## Footnote measures of success or failure of an enterprise for a given period of time

Question 34

Liquidity ratios

Answer 34

Current ratio= CA/CL Quick= (cash+ST MS+net AR)/CL AR turnover= NS/avg. net AR Days in AR= ending net AR/(sales/365) Inventory turnover= COGS/avg inventory Days in inventory= ending inv/(COGS/365) AP turnover= COGS/avg AP Days AP outstanding= ending AP/(COGS/365) Cash conversion= days AR+inventory-AP outstanding

Question 35

Solvency ratios

Answer 35

D to E= TL/TE TD= TL/TA Equity mult.= TA/TE Times int. earned= EBIT/int exp ## Footnote measures of security of protection for long-term creditors/investors

Question 36

Performance metrics

Answer 36

EBITDA= Sales-COGS-Op exp or NI+Income tax+interest+dep+amortization EPS= income avail to CS/WACC Price-to-earnings= price per share/basic EPS Dividend payout= cash dividends/NI Asset turnover= NS/Avg. assets ## Footnote measures used to evaluate operating performance and elements of a company's stock performance

Question 37

Identified concentrations only need to be disclosed if all of the following criteria are met:

Answer 37

1. The concentration exists at the financial statement date. 2. The concentration makes the entity vulnerable to the risk of a near-term severe impact. 3. It is at least reasonably possible that the events that could cause the severe impact will occur in the near-term.

Question 38

comprehensive basis of accounting other than GAAP would include

Answer 38

Cash basis and modified cash basis Tax basis Prescribed regulatory basis Other basis with substantial support (e.g., price level basis)