Flashcards in FAR Deck (321)
When common stock and preferred stock are issued in a lump sump purchase, how is APIC allocated?
APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.
When is APIC recorded on a stock subscription?
APIC increases on date subscription is recorded – not on the date paid for or issued
How are changes in accounting principle applied?
-Prior Periods adjusted
-Retained Earnings adjusted
-Completed Contract to % Completion
Ex: LIFO to FIFO
What is a serial bond?
Any bond that matures in installments
What items are included in operating activities on the Statement of Cash Flows?
Cash received from Customers, Interest & Dividends, Trading Securities
Cash paid to Vendors, Suppliers, Interest, Taxes, Trading Securities
When is the fair value method used for recording interest in a separate company?
20% Ownership or Less
Accounted for as a purchase
If amount paid is less than fair value, results in a gain in current period
What is a current asset?
Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle
Includes: Demand deposits, cash equivalents, accounts receivable, inventory, prepaids, and short-term investments
What is a 'temporary difference' related to deferred taxes?
GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another
Example: Dividends from a subsidiary accounted for using the Equity Method; tax income, but not book income
How are derivatives recorded?
At cost when acquired, re-valued to fair value each period on Balance Sheet.
What is the primary objective of accounting?
To measure income
What expenditures are included in the cost of equipment?
All expenditures to get the asset into 'working condition' and ready for use:
Purchase price + liabilities assumed
Construction loan interest
Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.
What is the primary objective of governmental accounting?
To provide information that is useful and benefits a wide range of users including:
Costs of services provided
Sufficiency of revenues to cover costs
Financial position of entity
Which organization's standards are the most authoritative in the hierarchy of international accounting?
The International Accounting Standards Board (IASB)
Which costs are inventoriable?
Purchases - net of discounts
Freight - FOB Shipping point costs go to buyer, FOB Destination costs charged to seller
How are trading securities recorded?
On the balance sheet at Fair Value, as current assets
Unrealized gains/losses are recorded on the Income Statement
If they are reclassified as held-to-maturity or available-for-sale, there is no effect upon transfer.
What are the characteristics of a capital lease for a lessee?
Risk of ownership passes to lessee by:
Bargain Purchase Option (BPO)
Substance: Lease is more than 75% of asset's useful life or PV of minimum lease payments are more than 90% of fair value
Which financial statements are required for not-for-profit organizations?
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
Statement of Functional Expense (Volunteer Health Organizations Only)
At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?
Fair Value for assets contributed.
Present value of remaining cash flows for liabilities assumed.
Which personal financial statements are required?
Statement of Financial Condition
Statement of Changes in Net Worth
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.
What is a term bond?
Any bond that matures on a single date
What items are included in investing activities on a Statement of Cash Flows?
Cash received: Sale of PP&E, Sale of Investments, Loan Principle
Cash paid: Loans, Acquisitions, AFS or HTM Securities, Taxes, Trading Securities
When is the equity method used when purchasing another company's stock? How is it recorded?
Ownership 21% to 50%
Gives 'significant influence'
Purchase Price - Par Value = Goodwill
Dividends received from the investee reduce the investment account and are not income
What is a current liability?
A liability expected to be paid within 12 months or less
What is a deferred tax asset?
Deduction will reduce future income taxes expense.
How are unrealized gains/losses on trading securities recorded?
Recorded on income statement
What is the most authoritative set of accounting pronouncements?
The FASB Codification
All announcements fall under the Codification 'umbrella'
How are Research and Development costs recorded?
They are expensed in the period incurred and are not capitalized.
What are the three major types of funds in governmental accounting?
Where is the first place management should look for guidance on international recognition and accounting policies?
The International Financial Reporting Standards (IFRS) issued by the IASB
When does ownership of goods transfer when shipped FOB Shipping Point?
FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock
How are Available-For-Sale securities recorded?
On the balance sheet, at fair value as either current or non-current assets.
Unrealized gains/losses are included in OCI (Other Comprehensive Income)
If reclassified as held-to-maturity, unrealized G/L go to Stockholder's Equity
If reclassified as trading securities, unrealized G/L recognized in current period.
How is a capital lease recorded?
Capitalize at cost:
Asset & Liability Recorded at Present Value of Future Lease Payments
Discount Rate = Lesser of Implicit Rate in the Lease or Market Rate
What are the major classifications found on a Statement of Financial Position?
Similar to Balance Sheet:
Permanently Restricted Assets
Temporarily Restricted Assets
How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?
Unlike in Regulation where the partner’s tax basis is reduced by the amount of the mortgage that the other partners absorb, calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability
Example: If you contribute a $100,000 building with a 20,000 loan, your capital account is increased by $80,000, instead of allocating the liability to the other partners according to their ownership %.
How are assets and liabilities valued in a personal financial statement?
Estimated current value
To what extent is retained earnings restricted if legally restricted due to Treasury Stock?
It will be restricted to the extent of the balance in the Treasury Stock account.
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.
What is a debenture bond?
A bond not secured by any collateral
What items are included in Financing Activities in a Statement of Cash Flows?
Cash received: Issuance of Stock, Issuance of Debt
Cash paid: Dividends
When are companies required to file consolidated financials? How is it recorded?
Ownership of other company is greater than 50%
Investment account is eliminated
Only parent company prepares consolidated statements, not subsidiary.
Acquired assets/liabilities are recorded at Fair Value on acquisition date.
Eliminating entries for intercompany sales of inventory & PPE, also intercompany investments
How is the Quick Ratio calculated?
(Cash + A/R + Trading Securities) / Current Liabilities
What is a deferred tax liability?
Income will be taxable in a future period and will increase future tax expense
How are gains and losses on Available for Sale (AFS) securities recorded?
They are included in Other Comprehensive Income.
What is the highest authority within the FASB codification?
FASB SFAS, APB Opinions, ARBs
Which expenditures are included in the cost of a building?
All expenditures to get the building into 'working condition' are ready for use
Which two accounting bases are used in governmental accounting?
Accrual basis - current economic resources focus (revenues recognized when earned)
Modified accrual basis - current financial resources focus (revenues recognized when available and measurable)
Which framework helps to develop standards for international accounting?
The IASB Framework
* The framework is NOT a standard itself
* The framework does not supersede any standard's authority
When does ownership transfer when goods are sent FOB Destination?
FOB Destination keeps the items in the seller’s inventory until it reaches the buyer
How are held-to-maturity securities recorded?
On the balance sheet at amortized cost as current or non-current assets.
Unrealized gains or losses are not applicable.
If reclassified as available-for-sale, unrealized G/L go to Stockholder's Equity
If reclassified as trading securities, unrealized G/L recognized in current period
What footnote disclosures are required for a capital lease?
Future minimum rental commitments
By year – for 5 years
All remaining years as a group
What are the major classifications in a Statement of Activities?
Similar to an Income Statement, organization-wide:
Expenses - ONLY deducted from Unrestricted Revenues
Gains and Losses
Changes in Net Asset classes
If no goodwill is recorded upon admission of a new partner, which method is used for recording the new partner's interest?
The bonus method:
Old Partnership Equity
+ New Partner Contribution
= New Partnership Equity
x New Partner %
= New Partner Equity Amount
New Partner Contribution
- New Partner Equity Amount
= Bonus to Prior Partners using same allocation as P/L
How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a personal financial statement?
Presented on Statement of Financial Condition between Liabilities and Net Worth
When are dividends in arrear recorded for cumulative preferred stock?
They are not accrued until declared.
How is a change in accounting estimate applied?
A change in accounting estimate is applied prospectively (going forward).
No backwards adjustment is made.
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
What is the direct method for a Statement of Cash Flows?
Starts with Income from Continuing Operations
Adjusts for changes in accounts like A/R, A/P, Inventory and non-cash revenues, expenses, gains, losses
If used, the Indirect Method must also be shown
When is consolidation not required?
Ownership less than 50%
Majority owner does not 'control' - i.e. bankruptcy or foreign bureaucracy
How is the Current Ratio calculated?
Currents Assets / Current Liabilities
Which period's tax rate is used to calculate a deferred tax asset or liability?
The FUTURE enacted tax rate, not the current one.
It is never discounted to present value.
What is a Fair Value Hedge? How is it recorded?
Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment
Initially recorded on Balance Sheet at Fair Value
Gains/Losses recorded on Income Statement
What is the 2nd highest authority tier in the FASB codification?
FASB Technical Bulletins, SOPs, Industry Guides
Which expenditures are included in the cost of land?
All expenditures to get the land ready for its intended use:
Title & County Fees
Clearing of Land - Dirt work, etc.
Demolition and removal of old buildings (minus any scrap or salvage)
Note: capitalized land costs are not depreciated
What is a budget appropriation?
The highest amount allowed for a particular expenditure under a budget.
What is the objective of the IFRS framework?
To provide users with information on international accounting.
Which costs are non-inventoriable?
Interst on liabilities to vendors
Shipping expense to customers
What are the requirements for a capital lease for a lessor?
Same as for lessee (Title, BPO or Substance), PLUS:
Collectibility of lease payments is predictable
No uncertainties about the lessor reimbursing the lessee for costs incurred
What are the characteristics of a Statement of Cash Flows for not-for-profits? What are the major classifications?
Both direct and indirect methods are OK
Operating Activities - Unrestricted Revenues and Unrestricted Expenses
Financing Activities - Endowments and restricted contibutions
If goodwill is recorded upon admission of a new partner, how is the partner's interest recorded?
Using the goodwill method:
New Contribution / New Equity % = Partnership Value
Implied Value of Partnership
- Capital Accounts of all partners
= Goodwill to Old Partners
Under the Goodwill Method, the new Partner is paying an amount for a certain percentage stake in the partnership. For instance if they pay $1000 for a 25% stake, then it is assumed that the Partnership is worth $4,000 ($1,000/25%)
What is the general presentation on a statement of financial condition?
- Estimated taxes on assets sold
= Net Worth
When are dividends in arrears included as a disclosure and not an accrual in the financial statements?
If a year passes and no Cumulative Preferred Stock is declared, then the dividends in arrears are included as a disclosure – not an accrual in the Financial Statements.
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.
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
What is the Indirect Method for a Statement of Cash Flows?
Starts with Net Income
Adjusts for changes in accounts like A/R, A/P, Inventory and non-cash revenues, expenses, gains, losses
What occurs under a step acquisition?
Acquirer held previous shares accounted for under Fair Value Method or Equity Method and are now re-valued to Fair Value
Results in a Gain or Loss in current period
How is Working Capital calculated?
Currents Assets - Current Liabilities
What valuation allowance is used with respect to a deferred tax asset?
If it is “probable” that not all of a Deferred Tax Asset (debit) will be realized, then the Deferred Tax Asset account must be written down (credit) to reflect this
What is a Cash Flow Hedge? How is it recorded?
Cash flow hedges protect from exposure to fluctuations in cash flows.
Initially recorded on Balance Sheet at Fair Value
Gains/Losses going to OCI
Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.
What is the lowest authority in the FASB codification?
In an exchange of non-monetary assets, how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?
If the cash flows from the assets exchanged are not significantly different, no gain or loss is recognized on a non-monetary exchange, as it lacks commercial substance.
The new asset is recorded at the book value of the asset given up.
The only gain that can be recognized is any boot (cash) received.
What is an encumbrance?
Records purchase and reserves it for the encumbrance.
Which assumptions are followed within the IRFS framework?
The entity is a going concern (IFRS cannot be used if NOT a going concern)
Entity uses the ACCRUAL basis of accounting.
When are discounts recorded under the gross method?
Under the gross method, discounts are recorded only when used.
What are the characteristics of an operating lease for a lessee?
Risk of ownership does NOT pass
No asset or liability is recorded on the financial statements
Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement's life.
Which organizations are required to present a Statement of Functional Expenses?
Volunteer Health Organizations
How is life insurance presented on a personal financial statement?
Only shown if there is cash surrender value
It is shown net of loans against the policy
What is the gain or loss when a non-monetary asset is distributed to a shareholder?
The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company’s books
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.
How is the present value of a bond calculated?
Step 1: PV of $1 @ Yield Rate (not Stated Rate)
x Bond Face Value
Step 2: PV of an Ordinary Annuity of $1 for Term @Yield
x (Stated Rate x Face)
What is the difference between an acquisition and a merger?
Acquired companies continue to exist as a legal entity – their books are just consolidated with the parent company in the parent’s financial statements
Merged companies cease to exist and only the parent remains
How is A/R Turnover calculated?
Credit Sales / Average A/R
What effect do 'permanent differences' have on deferred income taxes?
They have no tax impact.
When calculating the total differences between book and tax income- subtract the permanent differences from the total before applying a future enacted tax rate
Where are gains and losses on foreign currency hedges recorded?
In Other Comprehensive Income (OCI)
Whose pronouncements are above industry practice in authority but below FASB Technical bulletins and industry guides within the FASB Codification?
Emerging Issues Task Force (EITF)
In an exchange of non-monetary assets, what gain is recognized if resulting cash flows are significantly different?
If resulting cash flows are significantly different, then the transaction has commercial substance and a gain/loss is recorded on the exchange.
The new asset is recorded at the FAIR VALUE of the assets given up, unless the asset acquired has a fair value that is easier to determine.
What is the opening budgetary entry?
Dr Estimated Revenues Control
Cr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
What are the qualitative characteristics of accounting information wtihin IFRS?
Understandability - Easy to use and understand
Relevance - helps user make decisions, predictive value, confirmatory role, materiality
Reliability - Faithful representation, substance over form, neutrality, prudence, completeness
Comparability - Comparative information from prior year is required
Under the net method, when are discounts recorded?
Under the net method, discounts are recorded whether used or not.
Unused discounts are allocated to financing expense.
What are the characteristics of an operating lease for a LESSOR?
Rent revenue recorded
Leased property remains an asset and depreciated by lessor
If payments fluctuate over the term of the lease, rent revenue recognized on a straight line basis
Which statements are required for non-governmental hospitals?
Statement of Operations
Statement of Changes in Net Assets
Statement of Cash Flows
Financial Statement Notes
How are business interests shown on a personal financial statement?
Business Interests that constitute a large percentage of total assets should be separated from other investments
What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?
The effect on Retained Earnings is the Carrying Amount of the asset
RE will be debited when the dividend is declared for the FMV of the asset, which is more (or less) than the carrying amount
Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash
The net effect of the entry is that RE will decrease by the CV of the asset
What are the requirements for a prior period adjustment?
Effect is Material
Is identifiable in Prior Period
Couldn't be estimated in Prior Periods
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
How are acquisition costs recorded in a merger?
Expensed in period incurred – i.e. NOT capitalized:
Accounting, Legal, Valuation, Consulting, Professional
Netted against stock proceeds:
Stock registration and issuance costs
How is Inventory Turnover calculated?
COGS / Average Inventory
What is deferred income tax expense?
The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities
GAAP Method for calculating is the 'Asset and Liability Approach'
Note: IFRS uses the 'Liability approach' only
What disclosures are required for derivative transactions?
Objectives and Strategies
Context to help investor understand the instrument
Risk Management Policies
Complete List of Hedged Instruments
How does managerial accounting differ from financial accounting?
Managerial Accounting has a “timeliness” focus
Managerial Accounting does not follow GAAP
How is donated property recorded by the donee?
Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose
Exam Tip - Think of a charity holding a “fair” and then donating the property which is then recorded at “fair value”
What is the closing budgetary entry?
Dr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Cr Estimated Revenues Control
Which aspects of RELEVANCE in IFRS differ from GAAP?
Under IFRS, a confirmatory role is played by information (as opposed to feedback value in GAAP)
Materiality falls under relevance for IFRS, versus being iprimary constrainti in GAAP
How is gross margin calculated?
Gross Margin = Sales – COGS (BI + P – EI)
What are the characteristics of a direct financing lease?
Interest Revenue (or expense for lessor) decreases with passage of time
Principal amount increases with each payment
Carrying amount of Lease decreases
Which basis of accounting is used for revenues and net assets?
Accrual basis of accounting is used
Only external parties can restrict the use of assets (permanent or temporary)
Assets earmarked internally by management are still classified as unrestricted
What is the discreet view in an interim financial statement?
Interim period is a separate accounting period - not GAAP
Same accounting principles used for annual reporting should be used.
When is Retained Earnings debited for FMV of Stock for a stock dividend?
When Stock Dividend is less than 25% of Common Stock outstanding
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
How are bonds reported when classified as trading securities?
Reported at FMV with unreleased gains and losses being included in earnings
How is Day Sales in Inventory calculated?
365 / Inventory Turnover
How do transactions denominated in in a currency other than a company's functional currency affect the income statement?
Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
How is donation of property recorded by the donor?
Recorded at Fair Value of asset given up.
Gain or Loss is recorded.
What are the types of governmental funds?
Special Revenue Fund
Capital Projects Fund
Debt Service Fund
How does RELIABILITY differ under IFRS from GAAP?
Both have neutrality and faithful representation or representational faithfulness.
GAAP also has verifiability;
as opposed to 'substance over form'
and prudence within IFRS.
Note: PRUDENCE or exercising caution replaces 'conservatism' in GAAP.
Describe the periodic inventory system.
Inventory is counted at certain times throughout the period
Weighted-average cost flow method is used.
How is a sale-leaseback recorded?
Any profit on the sale is deferred and amortized
Exception: If PV of lease payments is 10% or less of the asset’s FMV, the gain is recognized
If PV of lease payments is greater than 10% of FMV and the lease is operating, all of the gain is recognized except the amount of the PV of the lease payments
What are the characteristics of unrestricted assets or revenue?
No restrictions or conditions placed on entity in order to use the resources
Note: assets earmarked internally by management are still unrestricted
What is the integral view in an interim financial statement?
Interim period is a part of the annual period - GAAP
Gross profit method may be used to estimate COGS and inventory
Temporary declines in inventory aren't recognized
When is Retained Earnings debited for Par Value for a stock dividend?
When Stock Dividend is greater than 25% of common stock outstanding
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.
How are bonds amortized under the interest method?
Both discount and premium amortization amounts increase each year
How is Days to Collect A/R calculated?
Average A/R / Average Sales per Day
How are deferred tax assets classified as 'current' or 'non-current' on the balance sheet?
'Current' Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. All current amounts are netted and reported as a single amount on the Balance Sheet
'Non-Current' Deferred Tax Assets and Liabilities will impact income tax expense 12 months or more from the Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet
For the balance sheet, which date's translation rate is used to report assets and liabilities?
The current translation rate as of the balance sheet date is used to report assets and liabilities.
What is the focus of financial reports for individual companies?
Focus is on the needs of users to help them make decisions and assessments about the company
Does not make assessments of the economy
How is double-declining balance (DDB) depreciation calculated?
1 / (Useful Life x 2 x Book Value)
Ignore salvage value.
What is a general fund?
The 'operating' fund of the governmental unit
Records Significant Revenues: Taxes, Tickets, Fines, Licenses
Records Significant Expenditures: Police, Education, Fire Dept
How does comparability differ under GAAP versus IFRS?
Comparative information from prior year is required under IFRS.
GAAP requires that if multiple years are presented, they are consistently prepared, however it doesn't require prior year comparative statements.
Describe the perpetual inventory system.
Inventory count continually updated
Uses a moving-average cost flow method
What are the characteristics of lease payments under an annuity due situation?
Payments begin at the start of the lease period
Think: Rent/Mortgage payments are Due at the first of the month
When are revenues on contributions recognized?
Revenues on contributions are recognized in the year received, not the year the contribution is spent and are recorded at Fair Value on the date received
How are discontinued operations & extraordinary items reported in interim financial statements?
Fully recognized in Interim Period as incurred
If it occurs in Q3, it’s recognized in Q3
What is the effect of a stock dividend or a stock split on total shareholder equity?
Stock dividends and stock splits both have no effect on Total Shareholder Equity
How is a change in entity recorded?
All prior periods presented for comparative purposes must reflect the change
Footnote disclosures must be made
Changing to Consolidated Statements
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
How are gain contingencies recorded?
They are NOT accrued due to Conservatism
Which date's currency translation rate is used for the reporting of revenue and expense transactions in a foreign currency?
Use the weighted average exchange rate for the current year.
What are the two primary constraints of Financial Reporting?
Cost vs. Benefit
How is Sum of Year's Digits (SYD) depreciation calculated?
(Cost - Salvage Value) x (Remaining Useful Life / SYD) = Depreciation expense
For example, the depreciation factor for the third year of a 10-year asset would be:
= 8 / (10+9+8+7+6+5+4+3+2+1) = 8/55 = 14.5%
Remaining useful life = 8, SYD = 55
What is a special revenue fund?
Restricted for a specific purpose such as street repair.
What are the constraints within IFRS?
Cost vs. Benefit
Fair Presentation of the company - IFRS can be overridden if it misrepresents the true financial condition of the company, but it must be disclosed.
In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?
Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.
What are the characteristics of lease payments under an ordinary annuity situation?
Payments begin after the end of the first year
Think: An annuity that pays you at the end of each year
When are services rendered considered contributions?
If the organization would have otherwise paid for them
They increase the value of a non-monetary asset
How are cumulative gains and losses reported in interim financials?
Reported as if they occurred in the first quarter
What is the affect on APIC from a stock split?
Stock splits only affect par value - APIC remains the same.
What is the stated rate for a bond?
Rate on the face of the bond
When are loss contingencies recorded?
If Probable - they are accrued (if estimable) and disclosed
If Reasonably Possible - they are disclosed
If Remote - don't accrue or disclose
If the functional currency is the reporting currency, which exchange rate is used on the foreign currency financial statements?
Foreign Currency Financial Statements are remeasured into the Reporting Currency (Dollar) using the weighted-average exchange rate
What are the secondary constraits of Financial Reporting?
Consistency - Year vs. Year
Comparability - Company vs. Company
How is straight line depreciation calculated?
(Cost - Salvage Value) / Useful life = depreciation expense
What is a permanent fund?
Legally restricted fund, where only earnings can be used to fund programs.
Principal remains intact.
Which items are considered reporting 'elements' under IFRS?
How is inventory turnover calculated?
COGS / Average Inventory
Is hospital charity care revenue?
It is disclosed in the notes to the financial statements only.
How is inventory valuation handled in interim financials?
If inventory experiences a decline in value during an interim period, the loss is recognized in the interim period
If the loss is expected to be only temporary, no loss is recognized
When is compensation expense recorded at the time of grant for a stock option?
Compensation expense is recorded at the time of grant if options are exercisable immediately
They are based on past service.
Expense recognized = FV Stock Option x # of Shares
What is the market rate on a bond?
Rate that bonds are currently selling for
Where are remeasurement gains and losses due to foreign currency translation reported?
On the income statement as Other Income.
Describe 'Relevance' as a Qualitative Characteristic
Makes a difference to the user
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions
When is an asset considered to be impaired? How is impairment loss calculated?
When the undiscounted future cash flows are less than the carrying value of the asset.
Carrying Value - Fair Value = Impairment Loss
Note: impaired assets that recover their value can't be written back up once written down
What is a capital projects fund?
Used to acquire and build facilities.
What are the criteria for recognition on IFRS financial statements?
Probable future economic benefit
Can be measured reliably
If the value or outcome cannot be measured reliably, IFRS requires the use of the Cost Recovery Method.
How is Average Day's Sales in inventory calculated?
365 / Inventory Turnover
How are unconditional pledges to contribute recorded?
Classified as revenue in the current year only - multi-year future contributions fall under Temporarily Restricted.
What is one of the primary problems with interim reporting?
The matching principle gets messed up – Expenses incurred in one period may benefit future periods
What interest rate is used to discount stock options?
The risk-free interest rate
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
What are the qualities of Faithful Representation?
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information presented is without bias
Freedom from Error - No material errors or omissions
How are legal fees to defend a patent amortized?
If the patent is SUCCESSFULLY defended, the legal fees are amortized over the patent's economic life.
If unsuccessful, they are expensed immediately.
What is a debt service fund?
Handles repayment of long-term debt and related interest.
When transitioning to IFRS, what type of financial statement must be produced for the first reporting period?
A full comparative statement using IFRS.
Under a consignment system, who holds the consigned goods in inventory?
The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.
Which revenues are expenses deducted from?
Expenses ONLY deducted from Unrestricted Revenues, not Temporary or Permanently Restricted Revenues/Assets
For whom is segment reporting required?
Publicly traded companies
What date is used as the measurement date for share-based payments classified as liabilities?
The settlement date.
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
How does conservatism affect the recording of accounting transactions?
When an estimate is necessary due to uncertainty, conservatism chooses the best option that won’t overstate the financial position of the company
What are the two steps for testing goodwill impairment?
Compare the CV to the FV. If FV is greater than CV, no impairment exists, you’re done.
If impairment appears to exist, the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.
Which fund statements are issued in governmental accounting?
Statement of Revenues, Expenditures, and Changes in Fund Balance
If IFRS was implemented in June 2010 for use in the December 31, 2010, financial statements, what is the Date of Transition?
January 1, 2009, because a full year of comparative statements is required fromt he previous year
Under a consignment system, does the consignee hold consignment inventory in their own inventory?
No. Consignment goods are maintained in the inventory of the consignor, not the consignee.
What are the characteristics of temporarily restricted assets/revenue?
Use is restricted to a future time, which could then convert to unrestricted - Class: Temp. Restricted Revenue
Unrestricted contributions promised (including multi-year contributions), but not yet received are actually restricted by “time” and are therefore classified as Temporarily Restricted Assets - Multi-year contributions are recorded at the present value of the future contributions
What factors cause a segment to be significant and therefore to be reported separately?
Revenue of segment is 10% or more of total
Profit is 10% or more of total
Segment assets are 10% or more of total
75% Test - All segment revenues must equal 75% of total external revenues
How are compensation costs for share-based payments classified as liabilities measured?
Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period
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.
What is an accrual?
Earned (Revenue) or Incurred (Expense), but no Cash Receipt/Outlay yet
How are costs for developing software recorded?
Expenses prior to technological feasibility are expensed as R&D.
After technological feasibility, but prior to production, costs are capitalized.
Expenses incurred during production are charged to inventory.
Expenses incurred training on internal use software are expensed.
When is revenue recorded in governmental accounting?
When it is BOTH available and measurable, regardless of when it is spent.
For Property, Plant and Equipment, which election is the most efficient method for converting assets to IFRS?
The Fair Value election
What effect does overstatement or understatement of inventory have on ending retained earnings?
Misstatement of beginning inventory does NOT have an effect on ending retained earnings.
Misstatement of ENDING inventory does have an effect on retained earnings.
What are the characteristics of an endowment?
Use of investment is restricted, but income from investment could be either restricted or unrestricted
Must be under control of receiving entity (Quasi Endowment) in order to be recorded in unrestricted net assets
Otherwise, a memo entry is recorded
What is the disclosure requirement regarding sales of 10% or more for one customer?
If 10% or more of enterprise revenue comes from one customer, the segment making the sales must be disclosed
What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?
Net increse to SHE = Gain on settlement of debt + Credit to SHE from stock issuance
When does interest expense start accruing on a bond?
When the bonds are issued
What is a deferral?
Cash Receipt/Outlay, but not Earned (Revenue) or Incurred (Expense)
What is derived tax revenue?
Money collected from people 'doing' things:
Sales tax (buying cars) or income tax (people working)
Where on the financial statements are adjustments for adopting to IFRS made?
In the entity's retained earnings or equity
How does misstatement of ending inventory effect Ending Retained Earnings?
EI Over = COGS Under = ERE Over
EI Under = COGS Over = ERE Under
When is the donation of an art collection recognized as a contribution or asset?
Not recognized as assets or contribution revenue if they are held of display or education – or their sale results in the purchase of similar items
What is the primary purpose of a quasi-reorganization?
To eliminate a deficit balance in RE by restating its assets to Fair Value
It does not directly protect a company from its creditors
How is an interest payment on a bond calculated?
Cash for payment = Stated rate x Face amount
What is recognition in accounting?
When an item is recorded and included in the financial statements
What is imposed tax revenue?
Tax assessed just because things 'exist'
Example: property tax on a car (even if it's never driven), real estate tax
Recorded as a revenue when BUDGETED.
Estimated uncollectible property tax revenues don't offset revenues, so don't net them.
How is going concern different under IFRS than from GAAP?
Going concern is an ASSUMPTION under IFRS
Which costs are included in COGS first under the FIFO (first in first out) system?
The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1
This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes
When both Temporarily Restricted Assets and Unrestricted Assets are available for use, which assets are used first?
Temporarily restricted assets are used before Unrestricted assets.
How is return on Common Stockholder's Equity calculated?
(Net Income - P/S Dividends) / Average Common Stockholders Equity
Note: Average CSE = Common Stock + RE
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
Describe fair value with respect to an asset
The price you would receive if you sold the asset
Assumes asset is at its highest and best value
Assumes asset is sold at its most advantageous market to get the best price possible
What are the types of proprietary funds?
Internal Service Funds - to serve the needs of other governmental units (i.e. motor pool)
Enterprise Funds - provide goods or services to external users (i.e. post office)
How are extraordinary items treated under IFRS?
IFRS doesn't allow extraordinary items.
Which costs are included in COGS under the LIFO (last in first out) system?
The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50
How is a refundable advance recorded by a not for profit?
Classified as a Liability
Promise to contribute assets pending on certain conditions being met
Becomes unconditional once the possibility that it won’t happen is remote
How is book value per share of common stock calculated?
Total Common Stock
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
=Total Book Value
Book Value per Share = Total Book Value / Shares outstanding
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
What market assumptions are made in a fair value assessment?
Buyer and Seller are not Related
Buyer and Seller are Knowledgeable
Buyer and Seller are able to transact – i.e. This isn’t a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you’re trying to value at $10M
Buyer and Seller are both motivated to buy/sell
What are the proprietary fund financial statements in governmental accounting?
Statement of Net Assets
Statement of Revenues, Expenses, and Changes in Net Assets
Statement of Cash Flows
How is the completed contract method used under IFRS?
Completed contract method is not allowed under IFRS.
How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?
COGAS / Total Units = Weighted Average Cost Per Unit
How are investments recorded and valued in not-for-profit accounting?
Fair Value is mostly used
Exception - Equity method used when significant influence exists
How is the dividend per share payout ratio calculated?
Dividends per share / earnings per share
How is the retirement of bonds recorded?
Gain or Loss is Ordinary
Extraordinary if both unusual and infrequent
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market prices
For example, NYSE or NASDAQ
What are the types of fiduciary funds?
Agency Fund - government acts as an 'agent' or custodian
Pension Trust Fund - government is a trustee for a pension plan
Investment Trust Fund - government is a trustee over a series of investments
Private Purpose Trust - trust that benefits various individuals and entities
How is LIFO treated under IFRS?
IFRS does not allow LIFO.
How does FIFO's COGS relate to LIFO's in a time of changing prices?
FIFO's relationship to COGS will be opposite LIFO's relationship to COGS in periods of falling/rising prices.
How are scholarships recorded?
As a reduction of revenue, netted against college's tuition
How is basic Earnings Per Share (EPS) calculated?
(Net Income – Preferred Dividends) / Average C/S Outstanding
Note – If cumulative, subtract the P/S dividend regardless of whether or not they’re declared.
When is a gain recognized in a debt restructuring?
If terms are modified, and future payments are now less than the carrying amount of the debt, then a Gain is recognized
What items are included in a Level 2 valuation input?
How are assets and liabilities ordered in a governmental Statement of Net Assets?
Ordered by liquidity
Current and non-current
Which financial statements are required under IFRS?
Statement of Comprehensive Income
Statement of Changes in Equity
How do FIFO and LIFO change in a period of rising prices?
FIFO has the Lowest COGS
FIFO is a cat that sees a mouse…starts Low and is Rising
If COGS is Low, that means EI is High
How is depreciation expense recorded by a not-for-profit?
Depreciation expense is allocated proportionately to various functions
For EPS purposes, which date is used for calculation purposes when a stock split or stock dividend has occurred?
For EPS purposes, treat C/S stock splits or stock dividends as if they occurred at the beginning of the year, regardless of when actually issued during the year
What is the gain recognized under a settlement of debt?
Difference between cash paid and carrying amount of debt
Difference between non-cash asset given and re-valued at FMV and debt carrying amount
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs, such as assumptions or forecasts
Lowest priority for valuation
How are capital assets shown on a governmental Statement of Net Assets?
They are shown net of debt
Asset Cost - Accumulated Depreciation - Asset liabilities = Net assets
How is the term 'income' used in IFRS?
'Income' is used instead of revenue and encompasses BOTH revenue and gains.
How do FIFO and LIFO change in a period of falling prices?
FIFO has the Highest COGS
Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch
If COGS is High, that means EI is Low
For which areas is EPS required to be shown?
EPS is only required to be shown for Income from Continuing Operations and Net Income.
All others (discontinued operations, extraordinary items) can be shown on the Financial Statements or in the notes
For a creditor, how is a loan impairment recorded?
If future cash flows discounted at loan’s Effective Interest Rate are less than Carrying Value:
Effective Rate calculated using original rate, not modified rate
What are acceptable valuation techniqures for fair value?
Market approach - uses market transactions and prices to value the asset
Income approach - uses present value discounts earnings
Cost approach - uses replacement cost to value the asset
How is infrastructure reported on a governmental Statement of Net Assets?
Reported at cost, no accumulated depreciation
How is the term 'profit' used in IFRS?
In IFRS, the term 'profit' is used instead of Net Income.
Under a Lower of Cost or Market, how are the benchmarks calculated?
Market Ceiling = Net Realizable Value = Selling Price - Selling Costs
Market = Replacement Cost
Market Floor = Net Realizable Value - Normal Profit
When do stock options increase share outstanding?
Only if they are dilutive.
Their exercise price is LESS than the market value
If not, you ignore them in the calculation
What are current assets?
Inventory or Assets expected to be converted or consumed during a business' operating cycle
Deferred Gross Profit on Installment Sales (Contra Asset)
Receivables expected to be collected in 12 months or less
How is a Statement of Net Assets divided?
Into Governmental Activities and Business Activities
How does IFRS treat gains?
They are treated the same as revenue and are not separated on the financial statements.
How is EPS calculated when convertible bonds are taken into consideration?
[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents)
Bond interest is added back because if converted, there would be no bond interest expense
Contingent Issue Agreements are included in Diluted EPS if contingency is met
What are current liabilities?
Liabiities that will use current assets during the present operating cycle
How are activities presented in a Statement of Activities?
They are divided by function
If the activities of a component are distinguishable from the rest of the governmental entity- then discreet presentation is required
If the activities of the component cannot be identified and separated from the rest of the governmental activities- then blended presentation is warranted.
Component units are reported in the Entity-Wide Financial Statements and not the Fund Financial Statements.
How does IFRS treat losses?
In IFRS, losses are treated the same as expenses, but they ARE separated on the financial statements.
What is an accrued liability?
Expense that has been incurred, but not paid
Example: rents payable
How does refinancing of current liabilities to long-term liabilities under IFRS differ from GAAP?
Under IFRS, current liabilities can only be refinanced into a non-current liability if the refinance agreement is EXECUTED prior to the balance sheet date.
GAAP requires only intent to refinance- not actual execution.
What is a deferred revenue?
A type of current liability
Payments that have been received but cannot be recorded as revenue yet
Example: Tenant pre-pays rent – Landlord still must “perform” to earn it and is a liability until this happens
How do contingent liabilities differ between GAAP and IFRS?
Under GAAP, there are three classifications of contingent liabilities -
Under IFRS, contingencies are 'uncertain future events' and are classified as a provision if probable and measurable, even if uncertain in timing or amount.
When are revenues recognized?
When they have been earned; i.e. company has performed
How are bonds recorded under IFRS?
Bonds may be recorded on the Statement of Financial Position using one of two methods
Fair Value through profit or loss
*Liability revalued at the end of each period
*Gain or Loss recognized in period
*Using Effective Interest Method
What is a gain?
Increase in equity from an activity or event that is not central to the main activities of the business
Can be operating or non-operating
How are deferred taxes treated under IFRS?
They use the 'liability method' - all deferred tax liabilities must be reported, but only 'probable' deferred tax assets can be reported.
They are non-current on the statement of financial position.
What is a loss?
Decrease in equity from an activity or event that is not central to the main activities of the business
Can be operating or non-operating
When can deferred tax assets and liabilities be netted under IFRS?
ONLY if they are related to the same country/taxing authority
For example, China Deferred Tax Assets can’t offset Japan Deferred Tax Liabilities
What is an operating cycle?
Average time it takes to turn materials or services into Cash
Which tax rates are used for calculating deferred tax assets/liabilities under IFRS?
The enacted rate or substantially enacted tax rate.
(GAAP is the enacted tax rate only)
What is the present value of future cash flows?
Valuation method - the current value of a future amount of money using a specific interest rate
Which items are recorded on the Income Statement in IFRS?
Non-controlling interest in Profit/Loss
Net profit/loss attributable from equity
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
How are property, plant and equipment (PP&E) recorded and valued under IFRS?
Recorded at cost
Valued using either:
Cost model - asset carried at cost less accumulated depreciation and impairment loss
Revaluation model - asset adjusted to fair value less accumulated depreciation
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
What are the requirements for using the revaluation model for PP&E under IFRS?
Asset must be able to be reliably measured
Must be applied to whole class of assets- not just one asset
No guidance on how often assets should be revalued under IFRS
What is a market cost?
The sale price of an asset (Exit Cost)
How is investment property reported under IFRS?
Initially recorded at cost
Revalued using either Fair Value model or Cost model
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
How is profit or loss recorded in the current period for investment property under the Fair Value model of IFRS?
Recorded on the Income Statement
Investment P/L = IS
PP&E P/L = OCI
When is royalty income recognized? How is it recognized?
Recognized when earned
If the royalty % is applied against net sales, then subtract the estimated return amount from the gross sales first and then apply the royalty rate
Under IFRS, how is investment property reported under the Cost Model?
Carried at Cost minus Accumulated Depreciation
Fair Value must still be disclosed in the notes to the financial statements
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
How are leases reported under IFRS?
Operating Leases can be recorded as Investment Property if measured at Fair Value
All other investment property must use Fair Value Model if one asset uses it
What is deferred gross profit?
Gross Profit that can’t be recognized until cash is received
D.GP = Gross Profit % x Accounts Receivable
Pay attention to the year if GP% varies
How are intangible assets valued under IFRS?
Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss)
the Revaluation Model (Fair Value less Accumulated Depreciation)
What is the cost recovery method?
No revenue recognized until all costs are recovered from purchase of the asset
Most conservative method of revenue recognition when collection of sale price is uncertain
How is internally generated goodwill reported under IFRS?
It is not recognized.
What is subscription revenue? How is it recorded?
Payment has been received, but performance is not complete.
As company performs, revenue is recognized.
Recorded as a Deferred Revenue (Liability) on Balance Sheet
How is amortization of intangibles handled under IFRS?
If asset has a finite life- it is amortized over useful life.
If asset has indefinite life, it is not amortized, but is tested for impairment at the reporting date.
How are franchise revenues recorded?
Franchiser - Startup franchise fee revenue deferred until franchisee has completed substantial performance
Franchisee – Costs are deferred until corresponding revenue is recognized
When must a lease be recorded as a Finance Lease under IFRS?
If the substantial risks of ownership have passed to the Lessee, then the Lease must be accounted for as a Finance Lease
How do you calculate sales revenue starting from cash basis income?
Sales (i.e. Customer Payments)
+ Ending Accounts Receivable
– Beginning Accounts Receivable
= Sales Revenue on an Accrual Basis
How are defined benefit plans recorded under IFRS?
Project-unit-credit method calculates the PV of the defined benefit obligation
How do you calculate COGS starting from Cash Basis?
Cash Remitted (i.e. paid)
+Increase in Accounts Payable
–Increase in Inventory
=COGS on an Accrual Basis
How are interest expense and/or finance costs classified on an IFRS statement of cash flows?
They can be classified as either Operating or Financing
Once a classification is chosen, all future costs must be classified there
How are discontinued operations reported? When are they used?
Reported Net of Tax after Continuing Operations, but before Extraordinary Items
Company decides to cease operating a segment of its business
Includes Income (or loss) from the period plus the gain (or loss) from disposal
How are significant non-cash transactions recorded on an IFRS statement of cash flows?
They must be included in the notes to the financial statements.
What qualifies as an extraordinary item? How is it recorded?
Both unusual AND infrequent
Reported Net of Tax after Discontinued Operations
Note: Usual *or* Infrequent Items are reported as part of Continuing Operations
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
What are accrued expenses?
Those incurred but not paid.
Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale)
Period costs - Expenses amortized and recognized with the passage of time
When should impaired assets be written down to fair value and expensed?
What major items should be classified under General & Administrative (G&A) expenses?
Office staff salaries
Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense, not G&A
What are business start-up costs?
One-time costs for opening a new business
Expensed as they are incurred
When is interest *not* expensed?
Interest on projects (software) for internal use is not expensed, but is instead capitalized
What are the major components of comprehensive income?
Net Income + Other Comprehensive Income (OCI):
Cumulative accounting adjustments
Non-owner changes in equity
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
What is the purpose of a reclassification adjustment?
Avoids double counting items that were included in both Net Income and OCI
Example: AFS Securities previously included in OCI are now sold at a loss and reported on the Income Statement
Where is comprehensive income reported?
Reported in Stockholder’s Equity on Balance Sheet or in a Statement of Income and Comprehensive Income
Note: Earnings Per Share is not required for OCI
What disclosures on accounting policies are required in financial statements?
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Amortization of Intangibles