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Flashcards in FAR 2014 Deck (325)
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1

How are changes in accounting principle applied?

Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO

2

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

A change of principle.

Applied retrospectively.

3

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

A change in accounting principle.

Applied retrospectively.

4

How is a change in accounting estimate applied?

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

5

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

6

How is a correction of an accounting error made?

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

The correction of the error must be included in the footnotes.

7

What are the requirements for a prior period adjustment?

Effect is Material

Is identifiable in Prior Period

Couldn't be estimated in Prior Periods

8

How is a change from a non-GAAP accounting method to a GAAP method recorded?

It is treated as a correction of an accounting error.

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements

Correction of the error must be included in the footnotes

9

How does an inventory error effect the financial statements?

Effect on Ending Inventory : Effect on Net Income

If one is overstated- both overstated. If one is understated- both understated.

Misstating inventory corrects itself after TWO periods.

10

How is a change in entity recorded?

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

11

What is a serial bond?

Any bond that matures in installments

12

What is a term bond?

Any bond that matures on a single date

13

What is a debenture bond?

A bond not secured by any collateral

14

What is a sinking fund bond?

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed

15

What is the formula to calculate proceeds of a bond sale?

Present Value of the principal payment at maturity
+ Present Value of Interest Payments made
: Market Value of Bond Proceeds

16

How is the present value of a bond calculated?

Step 1: PV of $1 @ Yield Rate (not Stated Rate)
x Bond Face Value

PLUS

Step 2: PV of an Ordinary Annuity of $1 for Term @Yield
x (Stated Rate x Face)

17

Which costs are included in bond issuance costs? How are they recorded?

Include Engraving; Printing; Legal; Underwriter; Registration

Debited to a deferred charge account and amortized over life of Bond using S/L

Bond Proceeds - Bond Issuance Costs : Net Bond Proceeds

Time of amortization begins when issued

18

How are bonds reported when classified as trading securities?

Reported at FMV with unreleased gains and losses being included in earnings

19

How are bonds amortized under the interest method?

Both discount and premium amortization amounts increase each year

20

Describe the book value method when converting from bonds to stocks.

No gain or loss recognized

APIC is the plug for the difference between the Bond's Book Value and the Par Value of the Common Stock

21

What is the stated rate for a bond?

Rate on the face of the bond

22

What is the market rate on a bond?

Rate that bonds are currently selling for

23

What happens when the bond's market rate is greater than the stated rate?

Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value

24

What happens when a bond's market rate is less than the stated rate?

Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value

25

How does accrued interest on a bond affect the purchase price?

The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point).

Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.

26

When does interest expense start accruing on a bond?

When the bonds are issued

27

How is an interest payment on a bond calculated?

Cash for payment : Stated rate x Face amount

28

What amount of interest is expensed on a bond interest payment?

Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount

29

What are convertible bonds? Which recording method is used?

Bonds that can be converted to stock

Book value method used if no gain or loss

Market value method used if there is a gain or loss

30

How is the retirement of bonds recorded?

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent