FAR 2 - Financial Reporting and Disclosures

Question 1

Summary of Significant Accounting Policies

Answer 1

GAAP requires a description of significant policies included as a note to the financial statements

Question 2

Subsequent Event

Answer 2

an event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued

Question 3

Recognized Subsequent Events

Answer 3

1) Settlement of litigation
2) Loss on an uncollectible account (a customer files for bankruptcy)

*recognized in financial statements and disclose

Question 4

Nonrecognized Subsequent Events

Answer 4

Events that did not exist as of the balance sheet date

1) Business combination
2) Settlement of litigation, IF the litigation arose after the balance sheet date
3) Loss of plant or inventory due to fire or natural disaster
4) Changes in fair value of assets

*DISCLOSE Only

Question 5

Fair Value

Answer 5

The price that would be received to sell an asset in an orderly transaction between market participants in the principal (or most advantageous) market

Question 6

Principal Market

Answer 6

The market with the greatest volume or level of activity

Question 7

Most Advantageous Market

Answer 7

The market with the best price for the asset after considering transaction costs.
Ex) Price A: $50
Transaction cost A: $5

Price B: $59
Transaction cost B: $16

Fair Value is $50 because the net is larger and you don’t include the transaction costs

Question 8

Fair Value of nonfinancial assets

Answer 8

Determined based on whichever use results in the highest value

Question 9

Hierarchy of Inputs (FV hierarchy)

Answer 9

Level 1 inputs - quoted prices in active markets for identical assets

Level 2 inputs - quoted prices for non identical or quoted in a market thats not similar or something like that

Level 3 inputs - unobservable inputs for the asset or liability. Assumptions.

Question 10

Quantitative Thresholds for Reportable Segments

Answer 10

1) 10 percent “size” test
a) Revenue
b) Reported Profit or Loss
c) Assets

2) 75 Percent Sufficiency Test - Total revenue reported is less than 75 you need to report additional segments to get to that 75% mark

Question 11

Required Disclosures for public entities

Answer 11

1) Geographic Areas of revenues and long-lived assets
2) Major customers (if they are 10% of its revenues to a single customer - don’t disclose the actual name of the customer just that fact that it is a thing)

Question 12

Large accelerated filer

Answer 12

$700 million+ (equity?)

Question 13

Accelerated filer

Answer 13

75 million - 700 million

Question 14

Converting cash basis to accrual basis

Answer 14

OPPOSITE of preparing the operating section of the statement of cash flows

Revenue:
inflow assets - direct (^ ^) - AR
inflow liabilities - indirect (^ v) - unearned rev

Expenses:
outflow assets - indirect ( ^ v ) - Inventory/prepaid
outflow liabilities - direct (^ ^) - AP / other liability accruals

*IF CASH TO ACCRUAL, same as CFS…fucked me up on the practice question

Question 15

4 Areas of Partnerships

Answer 15

1) Admission of a partner
2) Profit and Loss distribution
3) Withdrawal of a partner
4) Liquidation of a partnership

Question 16

Admission of a partner

Answer 16

1) By purchase or sale of existing partnership interest - No journal entry is required
2) Investment of Additional Capital

A. Exact Method - purchase price is equal to book value, no goodwill or bonus recorded

B. Bonus Method - adjust existing capital accounts based on portion of total capital plus investment (distribute based on determined profit and losses % share)

C. Goodwill Method - book goodwill for implied value of the investment - total capital. Distribute value of goodwill to existing partner’s capital account

Question 17

Bonus / Goodwill Method EXAMPLES

Answer 17

A and B profit share 60:40. A capital $30,000, B capital $10,000. C invests $35,000 for a 1/3 interest in the new partnership.

Bonus Method: 
Cash      35,000
    A, Capital    6,000
    B, Capital    4,000
    C, Capital    25,000

(30,000 + 10,000 + 35,000 = 75,000 / 3) = 25,000
60% x 10,000
40% x 10,000

Goodwill Method:
Cash          35,000
Goodwill    30,000
     A, Capital           18,000 
     B, Capital            12,000
     C, Capital            35,000 

35,000 x 3 (35k for 1/3 interest) = 105,000
Total partner's capital account = 75,000
Difference = 30,000
60% x 30,000 = 18,000
40% x 30,000 = 12,000

Question 18

Profit and Loss distribution

Answer 18

Partnership accounts may be different from their respective profit and loss ratios. All payments for interest on capital, salaries and bonuses are deducted prior to distribution. These payments are provided in full, even in a loss situation

Question 19

Withdrawal of a partner

Answer 19

1) Bonus Method
2) Goodwill Method

*Adjust assets to reflect fair value for both methods
Dr Asset Adjustment
Cr Capital Accounts (based on %)

Bonus:
A, Capital (diff based on %)
B, Capital (diff based on %)
X, Capital (100% - taking off books)
             Cash (Buy out amount)

Goodwill:
Booking goodwill:
Goodwill
       A, Capital (%)
       B, Capital (%)
       X, Capital (% to get to exact buyout amount)

Removal of withdrawing partner:
X, Capital (100%)
Cash

Question 20

Liquidation of Partnership

Answer 20

Steps:

1) Identify G/L on sale of non-cash assets, allocate the G/L to the capital accounts of the partners based on %
2) Pay off liabilities to outside creditors
3) Pay off partner advances
* can be used to offset negative capital balances
4) If positive capital accounts, distribute remaining cash
4a) If negative capital account(s), remaining positive partner capital accounts absorb the loss of the other partner based on ratio of positive partner accounts (ex. negative partner 50%, B 30%, C 20%..absorb remaining losses 3:2 B:C.