F5 Flashcards
(126 cards)
1
Q
what are 4 examples of financial assets?
A
cash
ownership interests (stocks, partnerships, LLCs)
rights to receive cash or financial instruments
exchanges
2
Q
financial liabilities represent…
A
obligations to deliver cash or other financial instruments or exchanges with potentially unfavorable terms
3
Q
what are 5 examples of debt securities?
A
bonds
gov. securities
commercial paper
redeemable preferred stock
convertible debt
4
Q
what are the 3 debt security portfolio classifications?
A
trading
available for sale
held to maturity
5
Q
what are the 3 classifications for common equity?
A
no significant influence (<20%)
significant influence (20-50%)
acquisition (>50%)
6
Q
what are trading securities?
A
intended for active trading
reported at FMV
usually a CA
unrealized gains or losses reported in IS
7
Q
what are AFS securities?
A
reported at FMV
credit loss reported for amount by which amortized cost exceeds FV
a CA or NCA depending on intent of corporation
unrealized gain or loss reported in OCI
8
Q
what are HTM securities?
A
used when the investor has the intent to hold to maturity
reported at amortized cost
no realized or unrealized G/L
investing cash flow
9
Q
what are 3 examples of equity securities?
A
ownership shares (CS, PS)
rights to acquire shares (warrants, stock rights, call options)
rights to dispose of shares (put options)
10
Q
what does the practicability exception allow an entity to do for equity investments?
A
measure an investment at cost, plus/minus observable price changes of identical or similar investments, less impairment
11
Q
what firms are excluded from a financial instrument disclosure?
A
small private firms with assets of < $100M and no derivatives
12
Q
what are two examples an entity can elect the fair value option opposed to the usual recording option?
A
1) AFS can be at FMV with G/L in the IS instead of OCI
2) a significant influence equity investment under the equity method can be valued at FMV
13
Q
where are changes in FV due to instrument-specific credit risk recognized for financial liabilities?
A
OCI
ex. bonds, notes
14
Q
where are changes in FV due to instrument-specific credit risk recognized for derivative liabilities?
A
net income
15
Q
what are the two instances a realized gain or loss is recognized?
A
a debt security is sold
an AFS is deemed to be impaired
16
Q
a purchase or sale of a CA goes where on the SCF? a NCA?
A
CA: operating cash flow
NCA: investing cash flow
17
Q
any time you reclassify a debt security it is always going to be transferred at what?
A
fair value
18
Q
how do you record unrealized G/L when reclassifying a AFS to a HTM security?
A
amortize gain or loss from OCI with any bond premium/discount amortization
19
Q
how do you calculate expected credit loss and where is it recorded?
A
expected credit loss = PV of future cash flows - amortized cost
recorded on income statement
20
Q
where is excess credit loss beyond the estimated credit loss recorded for AFS securities?
A
excess loss goes to OCI
expected credit loss goes to IS
21
Q
what is difference in calculating realized G/L for trading vs. AFS security?
A
trading: selling price - CV
AFS: selling price - original cost
use original cost to prevent double counting when OCI unrealized G/L is transferred out
22
Q
what 3 things are not included in equity securites?
A
redeemable PS
convertible bonds
treasury stock
23
Q
equity securities that you do not have significant influence over are recorded at what?
A
fair value through net income (FVTNI) as a trading security
dividends and all G/L on the IS
24
Q
when is it acceptable for a firm to measure an equity investment at the practicability exception?
A
applicable for equity investments that do not have a readily determinable fair value
ex. equity investment in private companies
25
dividend income from an equity investment are recorded in net income unless it is?
liquidating dividend
stock dividend
common equity accounted for using the equity method
26
what is the JE for a liquidating dividend and what does this do to assets?
DR: cash
CR: dividend income
CR: investment in investee (excess dividend amount from RE)
dividend is a return of capital, assets become more liquid
27
what are the 5 qualitative indicators to record impairment for an equity investment recorded with practicability exception?
violating debt covenants
deficiencies in working capital
negative operating cash flows
significant and adverse changes in internal or external environment
a significant decline of something in the business
offers to buy from the investee
28
what are the debt securities that must be disclosed? what information must be disclosed?
AFS and HTM
FV, unrealized G/L, amortized cost basis, information about the securities
29
what are the disclosure requirements for equity securities?
unrealized gains and losses
30
what should be disclosed for equity investments valued with practicability exception?
CV of the security
impairment charges incurred during the period
amount of upward or downward adjustment made to CV due to observable price changes to better reflect the FMV of the security
31
are entities required to disclose information about the market risk of financial instruments?
no but they are encouraged
32
what is considered the amortized cost for an AFS security when determining if it is impaired?
purchase price = amortized cost for AFS security
33
how do you know a HTM or AFS security is impaired?
PV and FV are less than amortized cost
34
when does a liquidating dividend occur?
when the dividend received is greater than the share of the entity's retained earnings
35
when reclassifying from a trading security to any other security where do you transfer unrealized G/L?
nowhere, it has already been recognized in net income
36
when reclassifying from any other security to a trading security where do you transfer unrealized G/L?
on the income statement
37
when reclassifying from HTM to AFS security where do you transfer unrealized G/L?
record in OCI
38
when reclassifying from AFS to HTM security where do you transfer unrealized G/L?
amortize gain or loss from OCI with any bond premium/discount amortization
39
does it have to be voting stock for the equity method to be used?
yes
preferred stock is always valued at FVTNI
40
are dividends on common stock income under the equity method?
no
41
what are 7 instances in which the equity method is not appropriate and there would not be significant influence?
1) bankruptcy
2) investment is temporary
3) lawsuit or complaint is filed
4) standstill agreement is signed
5) another small group has majority ownership and operates the company on their own
6) investor cannot obtain financial information necessary to apply equity method
7) investor cannot obtain representation on the BOD
42
what is the formula for the price of the initial investment under the equity method?
cash + debt issued + FMV stock issued + legal fees
43
what are 2 things that can decrease the CV of the investment account under the equity method?
dividends
continuing losses of the investee (balance cannot go below zero)
44
what is the JE to record increase in the investment by the investor's share of earnings of the investee under the equity method?
DR: investment in investee
CR: equity in earnings/investee income (shows up on the IS)
45
what is the JE to record decrease in the investment by the investor's share of cash dividends from the investee?
DR: cash
CR: investment in investee
46
what are the 3 important things if an investor owns both common and preferred stock of the same company?
1) significant influence test is determined by the common stock ownership only
2) PS dividends are income (they do not reduce investment acct like CS dividends)
3) PS dividends must be reduced from NI to get equity earnings income on CS
47
what are the 2 differences attributable to between purchase price and NBV of the investee's net assets?
1) asset FV differences (FV is different that the BV of the PPE)
2) any remaining difference is unidentifiable and goes to goodwill
48
how is the excess of an asset's FV over its BV dealt with under the equity method?
amortized over the life of the asset and causes the investor's share of the investee's net income to decrease
DR: equity in investee income
CR: investment in investee
49
how is goodwill accounted for under the equity method?
embedded within the CV of the equity investment
50
what 2 things must be true for an equity method investment to be impaired?
1) FV < CV
2) entity believes the decline in value is NOT temporary
51
what are the 2 things you do when you go from no significant influence to significant influence?
1) add the cost of acquiring additional interest in the investee to the CV of the previously held investment
2) adopt the equity method now prospectively
52
if the investment's carrying amount has been reduced to zero due to investee losses what happens to the equity method?
the application of it is suspended and it can be resumed once the investee has returned to profitability and any net losses allocated to the investor during the suspension period are covered by the investor's share of the investee's net income
53
what are 3 examples of when the investor would have over 50% of ownership but lose control over the company?
legal reorganization
bankruptcy
entity operates under severe foreign restrictions
54
what is noncontrolling interest (NCI) and how is it reported?
portion of the subsidiary's net assets that is not attributable to the parent
reported at FV in the equity section, separate from the parent's equity
55
what is the acquisition method used for and what are 2 characteristics of it?
used to account for business combinations in which the investor establishes control over the investee
1) 100% of the net assets acquired are recorded at FV and goodwill regardless of ownership %
2) when companies are consolidated, the investee's equity is eliminated
56
what are the consolidation adjustments and the mnemonic?
CARINBIG
Common stock - subsidiary
APIC - subsidiary
Retained earnings - subsidiary
Investment in subsidiary
Noncontrolling interest
Balance sheet adjustment to FV
Identifiable intangible assets to FV
Goodwill
57
how do you deal with the CAR in the consolidation adjustments?
CS, APIC, and RE of subsidiary are eliminated by debiting each of their equity accounts
58
how do you deal with the IN in the consolidation adjustments?
investment in subsidiary is eliminated
noncontrolling interest is created and reported in equity section
59
how do you deal with BIG in the consolidation adjustments?
BS of subsidiary should be adjusted to FV
Identifiable intangible assets of subsidiary are recorded at FV
Goodwill is required for the unidentifiable assets
60
what are the debits in the EJE for a consolidated adjustment?
CS
APIC
RE
balance sheet adjustments to FV
identifiable intangible assets to FV
goodwill
61
what are the credits in the EJE for a consolidated adjustment?
investment in subsidiary
noncontrolling interest
62
what are intercompany transactions and how should they be treated?
transactions between the parent and subsidiary company
eliminate 100% of them regardless of whether there is NCI
63
how should an intercompany's profit in BI that was recognized by the selling affiliate in the previous year be eliminated?
with an adjustment (debit) to RE
64
if one member of the consolidated group acquires an affiliate's debt from an outsider, the debt is considered to be?
retired and a gain/loss is recognized
65
what is the EJE for an intercompany sale of land?
DR: intercompany gain on sale of land
CR: land (back to original cost)
66
how should dividends paid by the subsidiary be reported in the SCF?
dividends paid to noncontrolling shareholders should be reported in financing section
dividends paid to the parent company should not be reported
67
for a consolidated SCF, what items should be used in the reconciliation of net income to net cash provided by operations?
net income attributable to both parent and subsidiary
noncontrolling interest
68
what are the 2 ways a new partner may be admitted?
purchase an existing partnership interest
invest additional capital into the partnership
69
what are the 3 ways to account for a new partner investing via additional capital?
exact method
bonus method
goodwill method
70
what are the 3 ways contributions to a partnership are recorded?
1) assets are valued at fair value
2) liabilities assumed are recorded at their PV
3) partner's capital account equals the difference between FV of assets and PV of liabilities
71
when do you use the exact method?
the purchase price can be equal to the book value
72
when do you use the bonus method?
the purchase price can be less than the book value (can also be more)
73
when do you use the goodwill method?
the purchase price can be more than the book value
the new partner overpays
74
what is the exact method?
no goodwill or bonuses are recorded
old partners' capital account "dollars" stay the same
old partners' % ownership changes
75
what is the bonus method?
when the purchase price is more or less than the BV of the capital account purchases, bonuses are adjusted between the old and new partners' capital accounts and do not affect partnership assets
76
what are the 3 steps to account for the bonus method?
1) determine total capital and interest to new partner
2) if interest is less than amount contributed, bonus to old partner(s)
3) if interest is more than amount contributed, bonus to new partner
77
in the absence of an agreement what is the profit and loss distribution among partners?
equal share
78
why may partnership accounts differ from their respective profit and loss ratios?
distributions/withdrawals will be at different times and for different reasons for each respective partner
79
what are the 2 methods that can be used for the withdrawal of a partner?
bonus
goodwill
80
what are the 3 things involved in liquidation of a partnership?
disposing of the assets and collecting cash
paying off all liabilities to creditors
distributing the remainder (if any) to the partners
81
if a deficiency exists after creditors are paid what happens?
the remaining partners must absorb the deficiency according to their respective (remaining) profit and loss ratios
82
how are losses dealt with in liquidation?
all possible losses must be provided for before any distribution is made to the partners
losses in liquidating a partnership are charged to the partners in accordance with the partnership agreement
83
what are the 3 things that can result as a liquidation of the partnership's assets?
gain on realization
loss on realization
loss on realization resulting in a capital deficiency
84
what is a capital deficiency?
a debit balance in a partner's capital account and indicates the partnership has a claim against the partner for deficiency
85
what is the calculation of the implied value of the partnership based on?
*think of using goodwill method
the partner that paid the most
86
when is the only time the goodwill method can be used during a withdrawal of a partner?
when the existing partner's capital accounts will increase
87
when figuring out change in AR for indirect method what do you need to know if dealing with gross AR?
add back bad debt expense
88
what are the 3 things required as a supplemental disclosure to the SCF if the indirect method is used?
cash paid for interest
cash paid for income taxes
noncash investing and financing activities
89
if a trading security is a current asset what is it classified as on the SCF? non current asset?
CA: operating
NCA: investing
90
what are permanent tax differences and what do they affect?
transaction that affects only financial income or taxable income, not both
creates a discrepancy between taxable income and financial accounting income that will NEVER reverse
only affect current tax paid
do not affect future financial or taxable income
91
what are temporary differences and what do they affect?
differences between financial and taxable income that will reverse in future tax periods and affect the deferred tax computation
affects current and deferred tax accounts
92
when does a deferred tax asset (DTA) occur and what will it lead to?
when an item is recognized for book purposes before it is deductible for tax purposes
will lead to future deductible amounts
93
when does a deferred tax liability (DTL) occur and what will it lead to?
when an item is deductible for tax purposes before it is recognized for book purposes
will lead to future taxable amounts
94
what is interperiod tax allocation?
deals with permanent vs. temporary differences
95
what is intraperiod tax allocation?
deals with allocating the appropriate income tax in a period for income/loss from comprehensive income
96
what is the asset and liability method?
requires that either income taxes payable or a deferred tax liability (asset) be recorded for all tax consequences of the current period
97
what is formula for total income tax expense or benefit?
current income tax payable or refundable +/- change in the DTA or DTL in the CY
98
what are 7 examples of permanent differences? are they nontaxable or nondeductible?
tax exempt interest income (municipal, state) -> nontaxable
life insurance proceeds on a key person (CEO, CFO, etc.) -> nontaxable
life insurance premiums -> nondeductible
certain penalties, fines, bribes, kickbacks -> nondeductible
nondeductible portion of meal and entertainment expense -> nondeductible
dividends received deduction for corporations -> nontaxable
excess percentage depletion over cost depletion -> nondeductible
99
what are the 4 basic causes of temporary differences and what do they lead to?
1) book FS income first, tax income later -> DTL
2) tax income first, book FS income later -> DTA
3) book expense first, tax expense later -> DTA
4) tax expense first, book expense later -> DTL
100
what are 3 examples of booking FS income first, tax income later leading to a DTL?
installment sales
% completed construction contract vs. completed contract
equity method
101
what are 3 examples of taxing income first, booking FS income later leading to a DTA?
unearned rent
unearned interest
unearned royalties
102
what are 3 examples of booking expense first, tax expense later leading to a DTA?
bad debt expense
estimated liability/warranty expense
start up expenses
103
what are 3 examples of taxing expense first, booking expense later leading to a DTL?
depreciation expense
amortization of franchise
prepaid expense
104
when is a valuation allowance account created?
when some or all of the DTA is more likely than not (>50%) will not be used in the future
105
what is JE for recording a DTL in year 1?
DR: income tax expense - current
DR: income tax expense - deferred (equal to DTL)
CR: DTL
CR: income tax payable (equal to current tax exp.)
106
what is the JE for recording year 2 reversal of DTL?
DR: DTL
CR: income tax expense - deferred
107
what is JE for recording a DTA in year 1?
DR: income tax expense - current
DR: DTA
CR: income tax payable (equal to current tax exp.)
CR: income tax benefit - deferred (equal to DTA)
108
what is JE for recording year 2 reversal of DTA?
DR: income tax benefit - deferred
CR: DTA
109
what does an uncertain tax position represent?
some level of uncertainty regarding the sustainability of a particular tax position by a company
110
what are 4 examples of uncertain tax position?
a tax deduction
a decision not to file a tax return
an allocation or shift of income between jurisdictions
the characterization of income or a decision to exclude reporting taxable income in a tax return
111
what does GAAP require before reflecting a tax benefit in an entity's FS?
more likely than not standard (>50%)
112
what are the 2 steps in the two step approach for uncertain tax positions?
1) test more likely than not (>50% chance of winning)
2) measurement of tax benefit
113
what happens if the tax expense fails the most likely than not test?
tax benefit is not recognized in the FS
FS tax expense is increased
stop the test and do not go to step 2
114
how do you measure the tax benefit if step 1 for uncertain tax positions is passed?
start with greatest then work down until cumulative probability is greater than 50%
use the value that gets you over 50%
115
what do you do after you determine the accurate measurement of tax benefit?
subtract largest benefit from more likely than not benefit to determine income tax liability
this is the amount you would still have to pay to the IRS after the settlement
116
what is the enacted tax rate? what do you use it for?
tax rate when the taxable item is expected to be paid (liability) or realized (asset)
use for deferred taxes (temporary differences)
117
what does the liability method require?
requires that the deferred tax account balance (asset or liability) be adjusted when the tax rates change
118
what if a company can now recognize a DTA that was previously thought unusable?
the valuation allowance needs to be reversed which can lead to future tax savings
119
what if an entity goes from taxable to nontaxable status?
eliminate (write off) any existing deferred DTL or DTA
120
what if an entity goes from nontaxable to taxable status?
recognize a DTL or DTA for any temporary differences
121
how are DTAs and DTLs presented on the BS?
offset a DTA and DTL to net them into one amount
noncurrent
122
what do operating losses create?
DTAs
123
what is the maximum amount NOLs from 2021 or later can reduce taxable income? how long can NOLs be carried forward?
80%
forever
124
what is the exclusion % for a dividends received deduction?
ownership 0-19%: 50% exclusion
ownership 20-80%: 65% exclusion
ownership over 80%: 100% exclusion
125
when preparing interim financial statements, income tax expense is estimated using what tax rate?
the effective tax rate expected to apply to the entire year not just that quarter
126
do permanent differences have to be disclosed?
no
