FAR 1 (Framework, Overview, and Statements) Flashcards

Question

02 - GAAP and Accrual Accounting Relevance

Answer 1

Relevance is a primary qualitative characteristic. To be relevant, information about an item must have feedback value or predictive value (or both) for users and must be timely

Answer 2

The quality of information that helps users to increase the likelihood of correctly forecasting the outcome of past or present events

Answer 3

Reports accrual-based performance over a period of time. Dated as fiscal year ended.

Answer 4

Reports non-owner changes to equity over a period of time. Dated as fiscal year ended.

Answer 5

Reports economic resources and obligations. Dated as of a specific date.

Answer 6

Reports the changes in owners' equity over a period of time. Dated as fiscal year ended.

Answer 7

Reports changes in cash over a period of time. Dated as fiscal year ended.

Answer 8

Operating: Related to income statement transactions Investing: Related to long-term assets and investments Financing: Related to liabilities and owners' equity

Answer 9

Relevance: Predictive value, confirmatory value, and materiality (Does it RELATE to my decision?) Faithful Representation: Completeness, neutrality, and free from error (Can I DEPEND on it?)

Answer 10

Comparability, verifiability, timeliness, and understandability

Answer 11

Timeliness over faithful representation. Interim reports generally reflect estimates. The objective is to provide reasonable information in a timely fashion, rather than exact information.

Answer 12

Decision Usefulness

Answer 13

Information that assists capital providers in forming expectations about future events.

Answer 14

Information that confirms or changes past (or present) expectations based on previous evaluations.

Answer 15

Information that includes all necessary data to be faithfully representative.

Answer 16

Information that is free from any bias.

Answer 17

Information that has no omissions or errors.

Answer 18

The quality of information that enables users to identify similarities and differences between sets of information.

Answer 19

Different knowledgeable and independent observers could reach similar conclusions based on the information.

Answer 20

Information that is received in time to make a difference to the decision maker.

Answer 21

Information that a user can comprehend within the decision context at hand. Users are assumed to have a reasonable understanding of business and accounting.

Answer 22

There is a separate accounting entity for each business organization.

Answer 23

In the absence of information to the contrary, a business will have a definite life. This supports the historical cost principle for many assets.

Answer 24

Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the monetary unit of the country in which the business is operated. Values are not adjusted for inflation. Capital Maintenance - Financial capital is maintained so long as dividends do not exceed earnings and earnings are not negative.

Answer 25

The indefinite life of a business is broken into smaller time frames for evaluation purposes and reporting purposes.

Answer 26

The cash equivalent amount of an asset or liability at the time of origination. This is the market value of the item on the date of acquisition.

Answer 27

Used to approximate liquidation value or selling price. It is the net value to be received after the costs of sale are deducted from the current market value.

Answer 28

How much you would have to pay to replace an asset. Represents current market value from the buyer's perspective.

Answer 29

Also known as fair value. It is the price that would be received to sell an asset or settle a liability in an orderly transaction between market participants at the measurement date.

Answer 30

Historical cost less the accumulated amortization or depreciation of an asset.

Answer 31

Determined from discounting the expected future cash flows.

Answer 32

Increases in assets or extinguishment of liabilities stemming from the delivery of goods or the provision of services.

Answer 33

Revenues are recognized when they are realized and earned. Realization occurs when: - Goods or services have been provided - Collectibility of cash is assured - Expenses of providing goods and services can be determined

Answer 34

At the cash equivalent amount of the good or service provided.

Answer 35

Addresses when to recognize expenses. - Only when expenditures help to produce revenues - Some expenses are allocated based on the time period of benefit provided - Other expenses are recognized in the period incurred when there is no determinable relationship between expenditures and revenues

Answer 36

Financial statements should present all information needed by an informed reader to make an economic decision.

Answer 37

Entity Going Concern Unit-of-Measurement Time Period

Answer 38

Limit recognition and disclosure if the cost of providing the information exceeds its benefit. However, firms cannot omit disclosures if they are material and mandated.

Answer 39

The reporting of less optimistic amounts under conditions of uncertainty or when GAAP provides a choice from various recognition or measurement methods. - Avoid inflating expectations of capital providers - Conservatism conflicts with neutrality

Answer 40

Balance Sheet, Income Statement, Statement of Comprehensive Income, Statement of Cash Flows, and Statement of Owners' Equity.

Answer 41

Definition: Definition of a financial statement element is met Measurability: There is an attribute to be measured Relevance: Information is capable of influencing decisions Faithful Representation: Information is complete, neutral, and free of material errors

Answer 42

Resources that have probable future benefits to the firm, are controlled by management, and result from past transactions

Answer 43

Probably future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities as a result of past transactions or events

Answer 44

Residual interest in the firm's assets. Primarily comprised of past investor contributions and retained earnings.

Answer 45

Increases in net assets of an entity from transfers to it by existing owners or parties seeking ownership interest

Answer 46

Decreases in net assets of an entity from the transfer of assets, provision of services, or incurrence of liabilities by the enterprise to owners

Answer 47

Accounting income plus certain holding gains and losses and other items.

Answer 48

Increases in assets or settlements of liabilities of an entity by providing goods or services

Answer 49

Decreases in assets or incurrences of liabilities of an entity by providing goods or services. Provide a benefit to the firm.

Answer 50

Increases in equity or net assets from peripheral or incidental transactions

Answer 51

Decreases in equity or net assets from peripheral or incidental transactions. Provide no benefit to the firm.

Answer 52

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Answer 53

Market-based measurement. Determined for a particular asset, liability or equity item: - Single item - Group of related items Determination should consider attributes of the specific item being measured: - Condition, location, restrictions of use - FV not based on buyer's unique perspective

Answer 54

Assumed to occur at the measurement date Assumed to occur under current market conditions Not assumed to occur in forced liquidation or distressed sale

Answer 55

The market available to the entity with the greatest volume and level of activity for the item

Answer 56

The market available to the entity that maximizes selling price or minimizes transfer price

Answer 57

Buyers and sellers that are: - Independent of the reporting entity - Acting in their best economic interest - Knowledgeable of the item being measured and the transaction type - Able and willing to enter a transaction, but not compelled to do so

Answer 58

The amount paid to acquire an asset or received to assume a liability

Answer 59

The amount received to sell an asset or paid to transfer a liability

Answer 60

A gain or loss is recognized in income

Answer 61

Market Approach: Uses prices generated by real market transactions for identical or similar items Income Approach: Discounts future amounts to a current present value Cost Approach: Uses current amount required to replace the service value of an existing asset

Answer 62

- When the item is first recognized - When an eligible firm commitment is established - When the accounting treatment of an investment in another entity changes

Answer 63

Determine the Carrying Value (CV). Determine the Fair Value (FV). Determine the difference between CV and FV. Recognize difference as: - Write item up or down - Recognize gain or loss in current income

Answer 64

At each subsequent reporting date: - Adjust item to new fair value - Recognize difference as: - Write item up or down - Recognize gain or loss in current income DR: Asset CR: Unrealized Gain - Fair Value Option

Answer 65

The various assumptions that market participants would use in determining fair value

Answer 66

Observable: Developed based on market data obtained from sources independent of the reporting entity Unobservable: Reflect the reporting entity's own assumptions used in pricing; developed based on the best information available in the circumstances

Answer 67

Unadjusted quoted prices at measurement date in active markets for identical items. - Highest level - Most reliable evidence of FV - Liquidity discount: permitted - Control premium: not permitted - Blockage discount: not permitted

Answer 68

Inputs observable, either directly or indirectly, that do not meet all conditions for Level 1. - Quoted prices in active markets for similar items - Quoted prices in markets that are not active for identical items - Observable inputs other than quoted market prices that are relevant to an item being valued - Inputs derived from or corroborated by observable market data using correlation or other means

Answer 69

Unobservable inputs for the item being valued. - Lowest level, least desirable inputs - May use reporting firm's internal data - Based on assumptions or inferences that market participants would make

Answer 70

Whether fair value is used: - On a recurring basis - On a nonrecurring basis: only when certain conditions or situations occur

Answer 71

Responsible for appointing and approving the appointment of the Trustees of the IFRS Foundation. Provides a formal link between the Trustees and public authorities.

Answer 72

Formerly the International Accounting Standards Committee Foundation (IASCF). The Trustees appoint the members of the IASB, IFRS Advisory Council, and the IFRS Interpretations Committee. Responsible for overseeing, reviewing effectiveness, and financing the IASB. The 22 Trustees are paid and serve terms of three years (renewable once).

Answer 73

Responsible for promoting the IFRSs, including those for SMEs (small and medium-sized entities), and for approving Interpretations of IFRSs. The 16 members are paid and serve terms of up to five years (renewable once) and must sever all employment relationships with current employers, including rights to return.

Answer 74

Similar to the FASB's Emerging Issues Task Force. The committee's pronouncements are reviewed by the IASB before they are issued. Responsible for reviewing issues arising in the context of IFRSs and issuing Interpretations of those issues. The 14 members are not paid (though their travel expenses are met by the IFRS Foundation) and serve renewable terms of three years.

Answer 75

Advise the IASB on priorities and the views of interested organizations on major projects, as well as the benefits and costs of proposed standards. There are 30 or more members who are appointed by the Trustees.

Answer 76

1. Requirements in IFRSs dealing with similar and related issues 2. The definitions, recognition criteria, and measurement concepts for assets, liabilities, income, and expenses in the Framework 3. If no guidance exists, pronouncements of other standard-setting bodies using a similar conceptual framework, other accounting literature, and accepted industry practices

Answer 77

1. Item added to agenda 2. Conduct research and issue a Discussion Paper 3. Prepare and issue an Exposure Draft 4. Review public comments and discussions 5. Modify the ED, if necessary 6. Finalize and issue the IFRS

Answer 78

``` Assets Liabilities Equity Income Expenses ```

Answer 79

A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity

Answer 80

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying future benefits

Answer 81

The residual interest in the asset after subtracting liabilities

Answer 82

Increases in economic benefits deriving from increases in assets or decreases in liabilities that result in increases in equity. Income may be realized or unrealized and includes both revenues and gains. However, gains are usually reported separately from revenues

Answer 83

Decreases in economic benefits deriving from decreases in assets or increases in liabilities that result in decreases in equity. Expenses may be realized or unrealized and also includes losses. However, losses are usually reported separately from expenses

Answer 84

1. The financial statements are prepared on the accrual basis 2. The entity is a going concern

Answer 85

The SEC enforces compliance of GAAP for all publicly traded companies and compliance of IFRS for foreign registrants. Has the authority to set standards, but has delegated that task to the FASB (private sector)

Answer 86

Extensible Business Reporting Language. XBRL tags accounting data into a taxonomy to ease the access to the data.

Answer 87

Has five commissioners appointed by the President. Has four divisions. - Division of Corporate Finance: oversees compliance and examines all filings. - Division of Enforcement: Completes an investigation and takes appropriate actions when there is a violation of a securities law. - Division of Trading and Markets: Oversees the secondary markets, exchanges, brokers, and dealers. - Division of Investment Management: Oversees investments advisers and investment companies. Office of the Chief Accountant - Houses technical expertise on principles, standards, and requirements. Issues position papers for the SEC to consider. Is the link between the SEC and the profession.

Answer 88

``` Securities Act of 1933 Securities Act of 1934 Public Utility Holding Company Act of 1935 Trust Indenture Act of 1939 Investment Company Act of 1940 Investment Advisors' Act of 1940 Securities Investor Protection Act of 1970 Sarbanes-Oxley Act of 2002 ```

Answer 89

Financial Reporting Releases (FRR): Highest ranking authoritative source of accounting for public companies. Staff Accounting Bulletins (SAB): Provide the SEC's current position on technical issues Accounting and Auditing Enforcement Releases (AAER): Report the enforcement actions taken against accountants, brokers, or others

Answer 90

Governs the form and content of financial statements and financial statement disclosures. Income Statement, Balance Sheet, Changes in Shareholders' Equity, Statement of Cash Flows, Footnotes, and Qualification of Accountants (independence rules).

Answer 91

Governs the form and content of non-financial statement disclosures. Description of the business, description of stockholder matters, MD&A, changes in and disagreements with accountants, and information on directors and management.

Answer 92

Requires publicly traded firms offering securities for sale to the public in the primary and secondary markets to file a registration statement, and to provide each investor with a proxy statement before each shareholders' meeting.

Answer 93

Regulates the trading of securities after they are issued and provides the requirements for periodic reporting and disclosures.

Answer 94

Basic registration form for new securities. Part 1 - Prospectus that describes the issuing company, business operations and risks, financial statements, and expected use of proceeds. Part 2 - Information about the cost of issuing and distributing the security, detailed information about the directors and officers, and additional financial statement schedules.

Answer 95

- 2 years of Balance Sheets | - 3 years of Income Statements, Statements of Cash Flows, and Statements of Owners' Equity

Answer 96

- Form 10-K - Annual filing - Form 10-Q - Quarterly filing - Form 8-K - Significant events - Proxy Statement - Management request to vote through proxy for shareholders at meetings

Answer 97

Foreign Corrupt Practices Act of 1977 - Prohibits bribes of goreign governmental or political officials for the purpose of securing contracts or business Sarbanes Oxley Act of 2002 (SOX) - Enhance corporate governance and mitigate financial accounting abuses - Established the Public Company Accounting Oversight Board (PCAOB) - Limited auditors services - Increased reporting on internal controls - Increased penalties for fraud and white collar crime

Answer 98

- Reports the entity's financial position at a point in time - Most reported account balances do not represent current market value - Provides information useful in assessing the entity's financial strengths and weaknesses - Classified Balance Sheet: distinguishes current and noncurrent assets and liabilities to help users assess liquidity - Does not report all assets of the firm, only the assets acquired through a transaction

Answer 99

Historical Cost: Some accounts are measured and reported at a fixed, unchanging historical amount. Depreciated, Amortized, or Depleted Historical Cost: The remaining portion of a fixed, unchanging historical amount. Market Value: Also called "fair value," is the selling price for assets and amount currently required to retire a liability. Net Realizable Value: The amount the firm expects to receive from the sale or collection of the item. Present Value: The measure of current sacrifice when extinguishing the debt at the balance sheet date. The present value of a future cash flow is its discounted value.

Answer 100

An asset expected to be realized in cash or to be consumed or sold during the normal operating cycle, or within one year of the balance sheet date, whichever is longer. Cash, cash equivalents, ST investments, A/R, inventory, prepaids.

Answer 101

A liability expected to be extinguished through the use of current assets or by the incurrence of other current liabilities. A/P, accrued liabilities, unearned revenue, income tax payable, notes payable, current portion of LT debt.

Answer 102

Defined as assets and liabilities that are not current. GAAP only explicitly defines current items. NCA - LT investments, property, plant, equipment, intangibles, "other" assets. NCL - Notes payable, bonds payable, lease liabilities, pension liabilities, post-retirement health care liabilities, deferred taxes.

Answer 103

Current Ratio = CA/CL (usually expect a minimum value of 2) Quick or Acid-Test Ratio = (Cash +/- Short-term Investments +/- AR) / CL (should be at least 1)

Answer 104

The excess of the purchase price paid for another business over the market value of its net assets. Only recognized on the balance sheet of a purchaser when a firm is purchased. Internally generated goodwill is expensed.

Answer 105

Contributed Capital - Common stock, preferred stock, additional paid in capital, treasury stock (contra) Retained Earnings - Net income, less dividends

Answer 106

Has a balance opposite that of the associated account in terms of debit and credit.

Answer 107

Has a balance that is the same as that of the associated account in terms of debit and credit.

Answer 108

Used to increase or decrease the book value of an item to a measure of current value. Not all contra or adjunct accounts are valuation accounts, but all valuation accounts are contras or adjuncts.

Answer 109

Total OE (Net Assets) - Found on balance sheet Market Value of Net Identifiable Assets - Amount of cash that would remain after selling all identifiable assets and paying off all liabilities. Also called the liquidation value. Total Value of the Firm - The total value of the firm's outstanding stock (Market Capitalization)

Answer 110

Report the aggregate balance of several subsidiary accounts.

Answer 111

The periodic process leading to the preparation of financial statements. 1. Analyze relevant source documents and record journal entries in a journal. 2. Post the information from the journal to the accounts in the ledger, on a periodic basis. 3. Record adjusting journal entries at the end of the accounting period. These journal entries are also posted to the accounts. 4. Prepare trial balances. 5. Prepare the income statement, balance sheet, and statement of cash flows. 6. Close the temporary account balances and transfer the net income amount to retained earnings.

Answer 112

Facilitate the review and control of similar transactions. Simplify the recording of journal entries because each recording affects the same accounts each time. The number of postings is reduced because only the sum of the changes need to be posted. Separation of duties for improved internal control is fostered.

Answer 113

On the Statement of Financial Position, IFRS specifies a minimum listing of accounts that must be presented. IFRS requires more detailed note disclosures. IFRS financial statements are cleaner in appearance with no U.S. GAAP parenthetical disclosures. IFRS does not require a specific formatting of information. Many countries use their customary formats, including presenting the items in reverse order and from less liquid to more liquid. This emphasizes the long-run perspective. U.S. GAAP discourages the use of the term "reserve" which is a category found within equity and liabilities in IFRS.

Answer 114

Must meet one of the following criteria: - It is expected to be realized in, or is intended for sale or consumption in, the entity's normal operating cycle - It is primarily held for the purpose of being traded - It is expected to be realized within 12 months after the reporting period - It is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period - All other assets are noncurrent

Answer 115

Must meet one of the following criteria: - It is expected to be settled in the entity's normal operating cycle - It is held primarily for the purpose of being traded - It is due to be settled within 12 months after the reporting period - The entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period - All other liabilities are noncurrent

Answer 116

Increases in net assets or settlements of liabilities by providing goods or services. Related to the primary business operations

Answer 117

Decreases in net assets or incurred liabilities through the provision of goods or services. Related to the primary business of operations. Provide benefit to the firm.

Answer 118

Increases in equity or net assets from peripheral or incidental transactions.

Answer 119

Decreases in equity or net assets from peripheral or incidental transactions. Do not provide value or benefit to the firm.

Answer 120

Currently used under U.S. GAAP. Essentially all revenues, expenses, gains, and losses are shown on the income statement and included in the net income allocation.

Answer 121

Prior Period Adjustments - shown on the Statement of Retained Earnings and are the correction of accounting errors affecting income of prior years. Other Comprehensive Income (OCI) Items - Foreign currency translation adjustments - Unrealized holding gains and losses on securities available for sale - Pension and other post-retirement benefit plan cost adjustments - Certain deferred derivative gains and losses Retrospective changes in accounting principles affecting income - treated as direct adjustments to retained earnings.

Answer 122

Limit the income statement to normal, recurring items. | Many other items would run through owners' equity.

Answer 123

Revenues - expenses + gains - losses. Recorded transactions, events, and adjustments. For many assets and liabilities, changes in market value are not recognized until substantiated by a transaction between willing parties.

Answer 124

The change in the net worth of a business enterprise during an accounting period. The net worth of a business enterprise is described as the fair market value of net assets Net income for the period would include all changes in FMV of assets and liabilities during the period. Mkt. Value of NA at 1/1 + NI + Owner Investments - Dividends and Stock Repurchases = Mkt. Value at 12/31

Answer 125

Includes routinely occurring items and other items that are appropriately included in income from continuing operations. GAAP is very loose with regard to presentation. Income from continuing operations includes all income items other than those in the bottom portion

Answer 126

Items that are specifically defined by GAAP as being unrelated to continuing operations. Not representative of the firm's ability to generate income and are unique items that will not be repeated. GAAP is very specific about measurement and presentation. Two major components: - Discontinued operations - major components of an entity that are either sold or planned to be sold - Extraordinary items - Both unusual and infrequent

Answer 127

Allocation of the total tax consequence for that year among income from continuing operations and: - Discontinued operations (IS) - Extraordinary items (IS) - Other comprehensive income items (AOCI) - Adjustment for retroactive accounting principle changes (Statement of RE) - Prior period adjustments (Statement of RE) Requires that cumulative effects of accounting principle changes be reported net of tax

Answer 128

Does not require that cumulative effects of accounting principle changes be reported net of tax

Answer 129

Presentation is largely based on a single comparison. Total revenues and gains are compared with total expenses and losses.

Answer 130

Presentation of income from continuing operations that includes multiple comparisons of revenues, expenses, gains, and losses. The reader is provided with the operating income, as well as the incidental or peripheral gains and losses.

Answer 131

Presents the components of both profit or loss and other comprehensive income within a single statement leading to total comprehensive income as the bottom line. Profit or loss is shown as a subtotal within the statement.

Answer 132

A separate income statement is presented along with a statement of comprehensive income.

Answer 133

IFRS requires minimum line items to be disclosed on the face of the income statement. U.S. GAAP only specifies certain things on the bottom portion of the income statement. IFRS mandates that additional line items, headings, or subtotals be disclosed separately. IFRS does NOT allow the reporting of income statement items as extraordinary. Terminology differences. U.S. GAAP allows alternative measures of performance to be reported on the face of the income statement.

Answer 134

IFRS requires firms to analyze expenses either by: - Function - Nature of the expense If a firm uses the functional system, the firm must disclose the additional information on the nature of expenses.

Answer 135

Focuses on the activity to which the expense relates. More prevalent in IFRS reports that reporting by nature.

Answer 136

Focuses on the type of expense.

Answer 137

The sum of net income and other comprehensive income. CI = NI + OCI Other Comprehensive Income items are not currently recognized as income and are recorded directly as increases or decreases in owners' equity.

Answer 138

Presents the components of profit or loss within a single statement leading to net income as a subtotal. Displaying the other comprehensive income items leads to total comprehensive income.

Answer 139

A separate income statement is presented immediately before the statement of comprehensive income. The net income amount resulting from the first statement is used as the beginning amount for the second statement, which then reports the other comprehensive income items.

Answer 140

To report the net change in equity (other than from transactions with owners) in a single amount and to provide a more complete picture of the total earnings of the firm for a period.

Answer 141

The following items are typically reported net of tax, but can also be reported on a pretax basis with the net aggregate income tax effect reported as a separate item: - Unrealized gains and losses on securities available for sale - Unrecognized pension and post-retirement benefit cost and gains - Foreign currency translation adjustments are changes in the value of foreign currency and accounts measured in foreign currency - Certain deferred gains and losses from derivatives

Answer 142

- Retrospective effects of changes in accounting principle - Prior period adjustments These are reported as adjustments to retained earnings.

Answer 143

The amount carried over form the previous period, and then either increased or decreased during the current period. Owners' equity account.

Answer 144

U.S. GAAP and IFRS presentation requirements are the same as of January 2012. International accounting standards allow firms to revalue plant assets and intangibles to fair value. A revaluation surplus can never be reclassified to affect net income.

Answer 145

How firms report the changes in their owners' equity accounts for the period. In addition to this, firms must also report the changes in the number of shares of equity securities. Statement is dated for a period.

Answer 146

Each OE account is reported in a separate column of a spreadsheet-type document.

Answer 147

Transportation In - Inventory related account that is used to close Cost of Goods Sold Transportation Out - A selling cost, not a product cost. It is closed along with other expenses and revenues.

Answer 148

Each account is explained from beginning balance to ending balance in one set of rows, one account schedule on top of another.

Answer 149

Report three years. Vertical format - Each year is stacked on top of the other. Vertical within each year and horizontal across years. Horizontal format - Each year is represented in side by side columns. Horizontal within each year and vertical across years.

Answer 150

- Required statement of IFRS, US firms have other reporting options - International statements must report: - Total comprehensive income with amounts separation of non-owner changes - Effect of retrospective application (change in accounting policy) or retrospective restatement (correction of an error) - Reconciliation of the beginning and ending carrying amounts of each component of equity - Amounts of dividends can be presented in the statement or in the notes - Under IFRS, entities may use different titles

Answer 151

Provides the beginning balance, changes during the year, and ending balance for the following accounts: - Stock - APIC - Retained Earnings - Treasury Stock - AOCI

Answer 152

Can be presented in the footnotes, supplemental schedules, or as a separate statement.

Answer 153

To provide information about the cash receipts and cash payments for an entity to help investors, creditors, and others assess: - Past ability to generate and control cash inflows/outflows - Probable future ability to generate cash flows sufficient to meet future obligations and pay dividends - Likely need for external borrowing Also provides information about investing and financing activities that do not involve cash inflows/outflows

Answer 154

Defined as - Short-term, highly liquid investments - Readily convertible to known amounts of cash - Sufficiently close to maturity so that the risk of changes in value due to changes in interest rate is insignificant Investments are considered cash equivalents only when their original maturity is 3 months or less A change in policy for designating cash equivalents is a change in accounting principle

Answer 155

``` Operating Activities Investing Activities Financing Activities Foreign Currency Translation Reconciliation Non-cash Investing and Financing Activities ```

Answer 156

Reports the actual operating cash flows in the operating section. Reports the reconciliation in a separate schedule.

Answer 157

Reports the reconciliation of net income and net operating cash flow in the operating section. Most commonly used method.

Answer 158

Relates to items that enter into the determination of net income and can be positive or negative. Inflows: From customers, dividends, and interest Outflows: To suppliers, to EE's, interest, and income taxes Direct approach: presents operating cash flow by classes of sources and uses Indirect approach: presents operating cash flow by adjusting accrual net income to operating cash flow (reconciliation of net income) Interest paid and received and dividends received are all operating cash flows, but dividends paid is a financing cash flow.

Answer 159

Relates to "investment in" and disposal of noncash assets and can be positive or negative. Inflows: Sale of LT assets, collection of loan principal, disposal of debt and equity securities (HTM & AFS), and sale of other productive assets Outflows: Purchase of LT assets, lending, investment in debt and equity securities (HTM & AFS), and purchase of other productive assets Presented in the same manner, regardless of whether the direct or indirect approach is used.

Answer 160

Relates to how the entity is financed and can be positive or negative. Inflows: Sale of own stock, proceeds from borrowing Outflows: Repurchase of own stock (treasury), paying back lenders (principle only), payment of dividends Presented in the same manner, regardless of whether the direct or indirect approach is used.

Answer 161

Reports the effect on the change in cash that results from changes in currency exchange rates. Shown as part of the reconciliation of the change in cash and cash equivalents during the period. Transactions that occur during the period should be converted using: - The exchange rate in effect at the date of each transaction, or - The average exchange rate for the period Balances held in foreign currency at period end should be converted to dollars using the spot (current( exchange rate at the date of the BS. Presented in the same manner, regardless of whether the direct or indirect approach is used.

Answer 162

Reconciles the net effect of operating, investing, financing cash flows and the net effect of foreign currency translation with the difference between cash at the beginning and end of the period. Net Increase (or Decrease) in cash and equivalents during X2 + Beginning cash and equivalents on 1/1/X2 = Ending cash and equivalents on 12/31/X2 Net change in cash and equivalents is the amount that must be exactly explained by the operating, investing, financing, and foreign currency categories.

Answer 163

Reports the significant investing and financing activities that occur, at least in part, without affecting cash. Presented in related disclosures (schedule or footnote)

Answer 164

Similarities: - Cash Flows from Investing Activities - Cash Flows from Financing Activities - Effect of Foreign Currency Translation - Reconciliation with Cash Change - Non-Cash Investing and Financing Differences: - Components of Cash Flows from Operating Activities (subtotal is the same) - Reconcile Cash Flows from Operating Activities with Net Income (D - supporting schedule, I - in body of stmt) - Payments for Interest (D - in body of stmt, I - additional disclosure) - Payments for Income Tax (D - in body of stmt, I - additional disclosure

Answer 165

Each item in the income statement is adjusted from an accrual basis to cash basis.

Answer 166

Separate cash flows for the following elements of operations: - Collections from customers - Collections for interest and dividends (on loans made and investments) - Collections form other operating sources - Payments to employees - Payments to suppliers - Payments for operating expenses - Payments for interest (on debt) - Payments for income taxes - Payments for other operating uses

Answer 167

Revenues may include accruals (revenue earned, but not collected) and exclude deferrals (cash collected, but revenue not earned) Revenue + A/R decrease - A/R increase + Unearned Rev increase - Unearned Rev decrease

Answer 168

Cost of Goods Sold may include changes in inventory and/or changes in accounts payable. C/G/S + Inventory increase - Inventory decrease + A/P decrease - A/P increase

Answer 169

Expenses may include accruals (expenses incurred but not paid) and/or deferrals (cash paid but expense not incurred). Note: this can apply to all types of expenses. Operating Exp + Prepaid Exp increase - Prepaid Exp decrease + Exp Payable decrease - Exp Payable increase

Answer 170

Shows the adjustments to Net Income necessary to arrive at Cash Flow from Operating Activities The schedule is identical to the "Cash Flow from Operating Activities" section using the Indirect Method

Answer 171

Begins with Net Income (accrual basis) and adjusts for items that entered into computing Net Income, but did not affect cash by the same amount. Net Income does not reflect net cash flow from operations - Add back non-cash charges (reductions) included in NI - Subtract out non-cash credits (increases) included in NI

Answer 172

Items that we deducted in getting net income, but did not cause cash to be used. - Depreciation Expense - Amortization Expense - Depletion Expense - Losses (from sale of assets, etc.) - Loss under equity method of accounting for investments - Amortization of Premium on Bond Investment - Amortization of Discount on Bond Payable - Decreases in current assets (A/R, inventory, ppd's, etc.) - Increases in current liabilities (A/P, deferred taxes, etc.) - Increase in Unearned Revenue

Answer 173

Items were added in getting net income, but did not cause cash to be received. - Gains (from sale of assets, etc.) - Amortization of Discount on Bond Investment - Amortization of Premium on Bond Payable - Undistributed income under equity method of accounting for investments - Increases in current assets - Decreases in current liabilities - Decrease in Unearned Revenue

Answer 174

Non-cash expenses that must be added back to net income by the amount recognized as an expense If amount is not provided, it can be derived form the balance sheet and related information, if given. Calculation of the unknown expenses can be done using a schedule or a t-account approach.

Answer 175

Non-cash deductions or additions that must be added back to or subtracted from net income by the amount recognized as a loss or gain. If amount is not provided, it can be derived from the balance sheet and related information, if given.

Answer 176

Used when an investor must recognize their share of the investee's net income or net loss in the period it it reported by the investee, whether or not any dividends are paid by the investee. The investor has increased (with revenue) or decreased (with loss) net income without any related cash flow. Only cash dividends received from the investee cause a cash flow.

Answer 177

Amortization of a premium or discount will enter into net income (through interest income or interest expense), but will not generate or use cash.

Answer 178

When bonds are purchased for more than maturity value, a premium results. The debit to interest income reduces the amount of net income, but does not use cash. The amount of amortization should be added back to net income. **If bonds had been acquired at a discount, the resulting amortization would have to be subtracted from net income.

Answer 179

When bonds are issued for less than maturity value, a discount results. The debit to interest expense reduces the amount of net income, but does not use cash. The amount of amortization should be added back to net income. **If bonds had been issued at a premium, the resulting amortization would have to be subtracted from net income.

Answer 180

Reflect the differences between the amount of revenue or expense recognized for net income and the amount of cash received or paid. Asset increase, NI decrease Asset decrease, NI increase Liability increase, NI increase Liability decrease, NI decrease

Answer 181

Unless an A/R is collected within the same period, there is no increase in cash. Net income would have to be decreased by the amount of an uncollected account receivable. The amount of the aggregate change in receivables (and other current assets) must be used to adjust net income to get the related cash flows. (EndBal - BegBal) Increases and decreases in other current assets would be treated in the same manner.

Answer 182

Unless A/P is paid within the same period, there is no decrease in cash. Net income would have to be increased by the amount of the unpaid account payable. The amount of the aggregate changes in payables (and other current liabilities) must be used to adjust net income to get the related cash flows. (EndBal - BegBal) Increases and decreases in other current liabilities would be treated in the same manner.

Answer 183

Differences between the amount of revenue recognized for net income and the amount of cash received. The amount of these increases or decreases must be added back to or subtracted from net income to get the related cash flow. Unearned Rev increase, NI increase Unearned Rev decrease, NI decrease

Answer 184

- Direct presents cash flows in terms of the specific sources from which cash was received/paid - Indirect develops cash flows by adjusting net income and does not identify specific sources - Either method will provide the same amount - Either method will have the same format for the other major sections - Direct is preferred by the FASB - Both require disclosure of Noncash Investing and Financing activities - Direct requires an additional schedule to reconcile net income - Indirect requires an additional disclosure of the amount of cash paid for interest and dividends

Answer 185

A required footnote that discloses the principles and methods chosen by management where GAAP allows a choice. Includes information about: - Depreciation method - Inventory valuation method - Securities classified as cash and cash equivalents - Basis for consolidation (amortization policies and revenue recognition policies) No required in interim statements if the policies have not changed.

Answer 186

Disclose the following: - Nature of the relationship between the related entities - Description of all related party transactions for the years in which an income statement is presented - Dollar amounts of the related party transactions for the years in which an income statement is presented - Any receivables or payables from or to related parties as of the date of each balance sheet presented

Answer 187

An enterprise in which substantially all of its efforts are related to establishing a new business. One of two criterion must be met to be classified as such: - Principal operations have NOT begun - If operations have begun, insignificant amounts of revenue have been generated by the company

Answer 188

Required to apply GAAP. Normal operating costs during the development stage are expensed, not capitalized, in anticipation of future revenue. Required Statements: - Income Statement - Balance Sheet - Statement of Cash Flows - Statement of Stockholders' Equity

Answer 189

- Accumulated operating deficit from operating losses (in the OE section of the Balance Sheet - Cumulative amounts in the Income Statement - Disclosure that the firm is a development stage enterprise - Disclosure that the firm was previously a development stage enterprise in the first year after the development stage is completed

Answer 190

- Combined aggregate amount of maturities on borrowings for each of the five years following the Balance Sheet - Sinking fund requirements - Aggregate amount of payments for unconditional obligations to purchase fixed or minimum amounts of goods/services - Fair value of each financial debt instrument - Nature of the firm's liabilities, interest rates, maturity dates, conversion options, assets pledged as collateral, and restrictions

Answer 191

- Rights and Privileges - Number of shares issued during the fiscal period - Liquidation preference of preferred stock (and if liquidation value is considerably in excess of par or stated value) - Other Preferred Stock Disclosures (Aggregate or per-share amounts at which preferred stock can be called & Aggregate or per-share amounts of arrearages) - Redeemable Preferred Stock (for each of the five years following the Balance Sheet and the amount of redemption requirements)

Answer 192

Errors - unintentional Irregularities - intentional Require a footnote disclosure. If prior period income is reflected, an adjustment must be made to correct beginning RE and any other accounts affected.

Answer 193

Disclose the nature and impact.

Answer 194

A narrative written by management. - Management's discussion about the operations of the firm, its liquidity, and capital resources - Management's view of the firm's financial condition, changes in financial condition, and results of operations through analysis of the financial statements - Forward-looking information is provided, including management's general prognosis about future sales, effects of competition, and expected effects of general macroeconomic conditions.

Answer 195

Both inflation (general price-levels) and specific price changes affect the interpretation of reported amounts.

Answer 196

The increase in general prices for a period of time.

Answer 197

The decrease in general prices for a period of time.

Answer 198

An index reflecting the aggregate increase in the price of many goods and services used by individuals.

Answer 199

Measurements in the price level in effect at a transaction date (not adjusted for inflation). Financial statement amounts are measured in nominal dollars.

Answer 200

Measurements in the general price level as of a specific date. Reflect an adjustment for inflation and allow comparisons using dollars with the same purchasing power. Adjustments allow comparisons of dollar amounts for transactions occurring on different dates. The effect of inflation is stripped away leaving "real" dollar measurements.

Answer 201

The change in the price of a specific good or service over a period of time. Restrictions: refer only to specific goods and services and are not necessarily correlated with inflation

Answer 202

The purchasing power of an asset is the amount of goods and services that can be obtained by transferring the asset to another party. During inflation, the purchasing power of an asset having a fixed unchangeable value decreases.

Answer 203

The specific price of monetary items cannot change. Examples: - Cash - Most receivables - Accounts payable - All liabilities payable in fixed dollar amounts - Certain investments in debt securities

Answer 204

The specific price of nonmonetary items can change. Examples: - Inventory - Plant assets - Investments in equity securities - Unearned rent - Other liabilities payable in goods and services

Answer 205

The change in purchasing power of an item due to a change in the general price level is measured only for monetary items because the specific price of nonmonetary items can change.

Answer 206

Results from holding monetary assets during deflationary times or having monetary liabilities during inflationary times

Answer 207

Results from holding monetary assets during inflationary times or having monetary liabilities during deflationary times

Answer 208

- Statement of compliance with IFRS - Summary of significant accounting policies - Supporting information for FS items

Answer 209

Includes: - Judgments and key assumptions made in applying those policies - Measurement bases used for recognition - Information enabling an assessment of the estimation uncertainty that could result in a material adjustment to the balances of assets and liabilities

Answer 210

Should be disclosed in the order of those financial statement items

Answer 211

- Amount of dividends proposed or declared before the statements were authorized for issue (US doesn't require disclosure of proposed dividends) - Additional information enabling an assessment of the firm's objectives, policies, and processes for managing capital

Answer 212

Firms operating in economies with very substantial inflation are required to provide disclosure of the impact of inflation. Requires financial statements to be restated to reflect the current general price level. Hyperinflation - 100% or more over three years

Answer 213

The development of quantitative relationships between various elements of a firm's FS. Enables comparisons across firms, especially within the same industry, and facilitates identifying operating and financial strengths and weaknesses of a firm.

Answer 214

Measure the ability of a firm to pay its obligations as they become due. ``` Working Capital Working Capital Ratio Acid-Test Ratio (Quick Ratio) Securities Defensive-Interval Ratios Times Interest Earned Times Preferred Dividend Earned Ratio ```

Answer 215

Measures the extent to which current assets exceed current liabilities. CA - CL

Answer 216

Measures the quantitative relationship between current assets and current liabilities in terms of the "number of times" CA can cover CL. CA / CL

Answer 217

Measures the quantitative relationship between highly liquid assets and CL in terms of the "number of times" that cash and assets that can be converted quickly to cash cover CL. [Cash + (Net) Receivables + Marketable Securities] / CL

Answer 218

Measures the quantitative relationship between highly liquid assets and the average daily use of cash in terms of the number of days that cash and assets can be quickly converted to support operating costs. [Cash + (Net) Receivables + Marketable Securities] / Average Daily Cash Expenditures

Answer 219

Measures the ability of current earnings to cover interest payments for a period. (Net Income + Interest Exp. + Income Tax) / Interest Exp.

Answer 220

Measures the ability of current earnings to cover preferred dividends for a period. Net Income / Annual Preferred Dividend Obligation

Answer 221

Measure the efficiency with which a firm carries out its operating activities. ``` Accounts Receivable Turnover Number of Days' Sales in Average Receivables Inventory Turnover Number of Days' Supply in Inventory Number of Days in Operating Cycle ```

Answer 222

Measures the number of times that accounts receivables turnover in a period. Indicates the quality of credit policies and the efficiency of collection procedures. (Net) Credit Sales / Average (Net) Accounts Receivable Average A/R = (Beg. Bal + End. Bal) / 2

Answer 223

Measures the average number of days required to collect receivables. A measure of the average age of receivables. 365 / Accounts Receivable Turnover

Answer 224

Measures the number of times that inventory items turnover during a period. Indicates over or under stocking of inventory or obsolete inventory. Cost of Goods Sold / Average Inventory Average Inventory = (Beg. Bal + End. Bal) / 2

Answer 225

Measures the number of days inventory is held before it is sold or used. Indicates the efficiency of general inventory management. 365 / Inventory Turnover

Answer 226

Measures the average length of time to invest cash in inventory, convert the inventory to receivables, and collect the receivables. It measures the time to go from cash back to cash.

Answer 227

Measure aspects of a firm's operating results on a relative basis. ``` Profit Margin (on Sales) Return on Total Assets Return on Common Stockholders' Equity Return on Owners' (all Stockholders') Equity Earnings Per Share (EPS - Basic Formula) Price-Earnings Ratio (P/E Ratio) Common Stock Dividends Pay Out Ratio (Total/Per Share Bases) Common Stock Yield ```

Answer 228

Measures the net profitability on sales. Net Income / (Net) Sales

Answer 229

Measures the rate of return on total assets and indicates the efficiency with which invested resources are used. (Net Income + Interest Expense) / Average Total Assets Average Total Assets = (Beg. Bal + End. Bal) / 2

Answer 230

Measures the rate of return on common stockholders' investment. (Net Income - Preferred Dividend) / Average Common Stockholders' Equity Average Common Stockholders' Equity = (Beg. Bal + End. Bal) / 2

Answer 231

Measures the rate of return on all stockholders' investment. Net Income / Average Stockholders' Equity Average Stockholders' Equity = (Beg. Bal + End. Bal) / 2

Answer 232

Measures the income earned per share of common stock. Indicates ability to pay dividends to common shareholders. (Net Income - Preferred Dividends) / Weighted Average Number of Shares Outstanding

Answer 233

Measures the price of a share of common stock relative to its latest earnings per share. Indicates a measure of how the market values the stock, especially when compared with other stocks. Market Price for a Common Share / EPS

Answer 234

Measures the extent (percent) of earnings distributed to common shareholders. Total Basis = Cash Dividends to Common Shareholders / Net Income to Common Shareholder Per Share Basis = Cash Dividends per Common Share / Earnings per Common Share

Answer 235

Measures the rate of return per share of common stock. Dividend per Common Share / Market Price per Common Share

Answer 236

Provide measures of relative sources of equity and equity value. ``` Debt to Equity Ratio Owners' Equity Ratio Debt Ratio Book Value per Common Stock Book Value per Preferred Share ```

Answer 237

Measures relative amounts of assets provided by creditors and shareholders. Total Liab. / Total Shareholders' Equity

Answer 238

Measures the proportion of assets provided by shareholders. Shareholders' Equity / Total Assets

Answer 239

Measures the proportion of assets provided by creditors. Indicates the extent of leverage in funding the equity. Total Liab. / Total Assets

Answer 240

Measures the per share amount of common shareholders' claim to assets. Common Shareholders' Equity / Number of Outstanding Common Shares

Answer 241

Measures the per share amount of preferred shareholders' claim to assets. Preferred Shareholders' Equity (including dividends in arrears) / Number of Outstanding Preferred Stocks

Answer 242

The first time adopter must apply all standards effective at the reporting date of the entity's first IFRS compliant financial statements and this application is retrospective.

Answer 243

When the most recent FS were prepared: - In compliance with US GAAP - In conformity with IFRS, except that an explicit and unreserved statement of compliance was not presented - In compliance with US GAAP with reconciliation to IFRS - In conformity with IFRS, but for internal use only - In conformity with IFRS for consolidation purposes, but without a complete set of FS or without presenting FS of previous periods.

Answer 244

First Reporting Date = the year end date for the period for which IFRS is first applied. Transition Date = the opening date of the earliest period for which full comparative financial statements under IFRS are presented.

Answer 245

- 3 statements of financial position - 2 statements of comprehensive income - 2 separate income statements (if presented) - 2 statements of cash flows - 2 statements of changes in equity

Answer 246

Must present reconciliations of US GAAP to IFRS to explain the impact of the adoption on equity and comprehensive income. - Reconciliation of equity as of the transition date - Reconciliation of equity as of the most recent US GAAP statement date - Reconciliation of US GAAP total comprehensive income

Answer 247

IFRS 1 prohibits the retrospective application of IFRS to these transactions. - Derecognition of financial assets and liabilities - Hedge accounting - Assets held for sale and discontinued operations - Certain aspects of accounting for non-controlling interest - Use of certain estimates

Answer 248

IFRS 1 permits exclusion for retrospective application of IFRS for these transactions. - Business combinations - Share-based payments - Insurance contracts - PPE - Leases - Employee benefits - Effects of foreign exchange rates - Compound financial instruments - Assets and liabilities of subsidiaries and joint ventures

Answer 249

Based only on cash receipts and disbursements. Revenues are recognized when cash is received and expenses are recognized when cash is disbursed (no matching). A Balance Sheet will only show Cash and Equity; no liabilities or other assets. Appropriate for small, very closely held businesses where the owners whose primary interest and survival depends on cash flows.

Answer 250

Combination of cash basis and accrual basis. Acceptable if the modification(s) have substantial support in practice: - Modification is equivalent to an element of accrual basis accounting - Modification is logical and consistent with GAAP

Answer 251

Using federal income tax rules and regs that a firm uses, or expects to use, in filing an income tax return. Income is recognized in the period taxable and expenses are recognized in the period deductible. Some items are never recognized for tax purposes, called permanent differences.

Answer 252

- If an adjustment relates to an error in the tax return of a prior year, then a prior period adjustment is appropriate. - If the adjustment relates to an item that is not an error and IS NOT BS related, the adjustment would be treated as a current period expense or income. - If the adjustment relates to an item that is not an error and IS BS related, the adjustment would be treated as a prior period adjustment.

Answer 253

Other Comprehensive Basis of Accounting Major non-GAAP comprehensive bases of accounting used by non-public business entities.

Answer 254

Appropriately address the special considerations that are relevant to: - The acceptance of an engagement - The planning and performance of an engagement - Forming an opinion and reporting on the financial statements

Answer 255

Prepared for an individual or group of related individuals; not a business enterprise. Prepared in conjunction with personal borrowing, personal financial planning, contract requirements, or legal requirements.

Answer 256

Statement of Financial Condition (Balance Sheet) | Statement of Changes in Net Worth (optional)

Answer 257

Income Statement | Statement of Cash Flows

Answer 258

Based on accrual accounting using fair value. Should report: - Assets at estimated current values - Liabilities at estimated current amounts - Personal Net Worth (Assets - Liabilities) - Estimated income taxes (as if assets were realized and liabilities were liquidated)

Answer 259

Shows the amounts and causes of the changes in net worth for an individual. Assets and liabilities are recognized on an accrual basis. Increases in Estimated Values of Assets - Decreases in EV of Assets - Increases in Estimated Amounts of Liabilities + Decreases in EA of Liabilities

Answer 260

Assets should be reported at estimated current values based on an assumed arms-length transaction, net of disposal costs. Set Asset Value Guidelines table on page 168.

Answer 261

Disclose the face value of life insurance policies. Disclose significant interest in separate businesses as a single line item and amount for each business interest, measured at the estimated CV of the net assets. Disclose interest in a business activity that does not function as a separate business as separate assets and liabilities that comprise the business activity. Disclose future interests and rights if they are: - Fixed or determinable in amount - Not contingent on the holder's life expectancy or the occurrence of a specific event - Do not require future performances by the holder

Answer 262

Listed in the Statement of Financial Condition in the order of liquidity, not separated into current/non-current categories.

Answer 263

Reported at estimated current amounts based on the lower of: - The amount at which the liability could be settled currently (liquidation value) - The present value of cash to be paid in future settlement See Liability Valuation Guidelines table on page 169.

Answer 264

Commitments or other liabilities should be recognized as a personal liability only if the obligations: - Are to pay a fixed or determinable amount - Are not contingent on others life expectancy or the occurrence of a specific event - Do not require future performances by others

Answer 265

Computed as if the assets and liabilities were disposed/settled at fair value and the resulting excess over their tax basis were taxed under the currently applicable laws and rates. For Assets, this amount is reported as a separate line item between Liabilities and Net Worth.

Answer 266

Listed in the Statement of Financial Condition in the order of maturity, not separated into current/non-current categories.

Answer 267

Net Worth = Assets (at current estimated value) - Liabilities (at current estimated amount, including a provision for income tax on the estimated taxable gain. Shown in the Statement of Financial Condition after liabilities in a manner similar to Capital.

FAR 1 (Framework, Overview, and Statements) Flashcards

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