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FAR Flashcards

1
Q

What is the primary objective of accounting?

A

to measure income

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2
Q

What does income measure?

A

a firms efficiency

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3
Q

What are the basis of all economic activity?

A

monetary units

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4
Q

What are the most authoritative accounting pronouncements?

A

FASB Codification

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5
Q

What are the two levels of GAAP?

A

Authoritative and non-authoritative

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6
Q

What are the differences between managerial and financial accounting?

A

Managerial has a more timeliness focus and does not follow GAAP

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7
Q

What are financial reports used for?

A

Providing useful information to users (existing and potential investors and creditors)

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8
Q

What reports must be filed with the SEC?

A

10k- annually and audited, 10Q- quarterly and reviewed

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9
Q

What are the primary constraints of financial reporting?

A

Cost v benefit and materiality

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10
Q

What are the secondary constraints of financial reporting?

A

Consistency (the ability to compare year over year) and comparability (the ability to compare company v company)

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11
Q

What are the qualitative characteristics of financial reporting?

A

Relevance and faithful representation

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12
Q

In order to be relevant, information must have:

A 
Makes a difference to the user. 
PCM - Passing confirms money
Predictive value- predicts the future trends
Confirmed value- past predictions
Materiality- could affect user decisions
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13
Q

In order for information to be faithfully represented it must be:

A

Complete. Nothing is omitted that would impact the decision making of the user.
Neutral- free from bias
Freedom from error

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14
Q

What are the enhancing qualitative characteristics of financial reporting?

A

Comparability- allows users to compare time periods
Verifiability- different users would likely reach the same conclusions with the same information
Timeliness- the information reaches the user in time to make a decision
Understandability

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15
Q

What is an accrual?

A

Revenue has been earned or an expense has been incurred with no cash outlay yet

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16
Q

What is a deferral?

A

A cash receipt or outlay that has been received but yet earned or incurred.

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17
Q

What is recognition?

A

When an item is recorded and included in the financial statements.

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18
Q

Rule of conservatism

A

When there is uncertainty, conservatism requires you to chose the best option that will not overstate the financial position of the company

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19
Q

Fair value

A

the price you would receive if you sold an asset. Fair value assumes the asset is at it’s highest and best value that it will be.

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20
Q

What are the market assumptions for fair value?

A

1- the asset is sold in the most advantageous market to get the best price possible
2- the buyer and seller are not related
3- buyer and seller are knowledgeable
4- the buyer and seller are able and motivated to transact- the buyer actually wants to buy and has the means, the seller actually wants to sell
5-

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21
Q

What is the fair value hierarchy?

A

Level 1- Top level- uses price quotes or market prices (eg. NASDAQ/NYSE)
Level 2- Mid level- eg. Interest rates
Level 3- Lowest- unobservable, uses forecasts and assumptions

22
Q

What are the three acceptable valuation techniques?

A

1- market approach- market transactions/prices value the asset
2- income approach- present value discounts earnings
3- Cost approach- replacement cost determines value

23
Q

When is revenue recognized?

A

When earned

24
Q

What is the difference between a gain and revenue?

A

A gain is an increase in equity that is not due to the central activities of a company. A gain can be operating or non-operating.

25
What is a loss?
A decrease in equity not due to the central activities of a business. Can be operating or non.
26
What is the operating cycle?
The average time it takes to turn services/materials into cash
27
5 asset measurement and valuation methods
1- PV of future cash flows 2- Historical cost- asset cost-depreciation/amortization 3- Replacement cost- entrance cost- cost to reacquire and asset 4- Market cost- exit cost- sales price of an asset 5- Net realizable value- sales price of an asset- selling/disposal fee
28
Net realizable value
Sales price of an asset- selling disposal fee
29
Entrance cost
Replacement cost- cost to reacquire an asset
30
Exit cost
Market cost- sales price of an asset
31
When are installment sales used?
When cash collection is uncertain
32
When is revenue recognized in installment sales?
When cash is received
33
What is the cost recovery method?
Most conservative approach when collection of a sales price is uncertain. No revenue is recognized until all costs from the purchase of the asset has been recouped.
34
When does the franchisee recognize franchise costs?
Franchise costs are deferred until corresponding revenue begins
35
When does franchiser recognize franchise revenue?
When the franchiser delivers and the franchisee begins recognizing revenue.
36
How to convert revenue from cash to accrual basis
``` SPEAR- BAR Sales (Payments) + Ending AR -Beginning AR = Sales revenue on an accrual basis ```
37
How to convert COGS from cash to accrual basis?
``` CRAP-I Cash remitted (paid) +increase in AP -increase in inventory = COGS on accrual basis ```
38
How are discontinued ops reported?
net of tax, after continuing operations but before extraordinary items
39
What are extraordinary items and how are they reported
items that are unusual AND infrequent, reported net of tax after discontinued ops
40
How are items unusual or infrequent in nature reported?
As part of continuing ops both gross and net of tax
41
When are expenses recognized?
When incurred, accrue if not yet paid
42
Product costs
product expenses matched with corresponding revenue
43
Period costs
amortized and recognized with the passage of time
44
How are impaired assets reported?
They are written down and expensed immediately if the impairment is felt to be permanent
45
How are start up costs reported?
They are expensed as incurred
46
When can you capitalize interest?
When the interest is for an internal project
47
What is comprehensive income?
Net income + OCI
48
What is OCI?
Other comprehensive income- non-owner changes to equity (investments by or dividends paid to owners do not count)
49
What is regulation S-K?
Under securities act of 1933 for issuers issuing an IPO.
50
What items are included in accounting policies disclosure?
``` Accounting principles used Basis of consolidation Inventory pricing methods Depreciation methods Amortization of intangibles ```
51
What are some items included in the risks and uncertainties disclosure?
Nature of operations Significant estimates and assumptions Concentration vulnerabilities

FAR (19 decks)

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