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Flashcards in FAR Deck (679):
1

What are the three major types of funds in governmental accounting?

Governmental, Proprietary, Fiduciary

2

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)

3

What is a budget appropriation?

The highest amount allowed for a particular expenditure under a budget.

4

What is an encumbrance?

Records purchase and reserves it for the encumbrance.

5

What is the opening budgetary entry?

Dr Estimated Revenues Control
Cr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)

6

What is the closing budgetary entry?

Dr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Cr Estimated Revenues Control

7

What are the types of governmental funds?

General Fund
Special Revenue Fund
Permanent Fund
Capital Projects Fund
Debt Service Fund

8

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

9

What is a Special Revenue Fund?

Restricted for a specific purpose such as street repair.

10

What is a Permanent Fund?

Legally restricted fund; where only earnings can be used to fund programs.

Principal remains intact.

11

What is a Capital Projects Fund?

Used to acquire and build facilities.

12

What is a Debt Service Fund?

Handles repayment of long-term debt and related interest.

13

Which fund statements are issued in Governmental Accounting?

Balance Sheet

Statement of Revenues; Expenditures; and Changes in Fund Balance

14

When is Revenue recorded in Governmental Accounting?

When it is BOTH available and measurable; regardless of when it is spent.

15

What is Derived Tax Revenue?

Money collected from people doing things:

Sales tax (buying cars) or income tax (people working)

16

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.

17

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)

18

What are the Fund Balance Types?

Restricted - Restricted by Contributor
Committed - Restricted by Government
Assigned - Intended for a purpose
Unassigned - Available to be spent
Non-spendable - Not in a spendable state

19

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

20

How are Assets & Liabilities presented on the Statement of Net Position?

Assets (Current & Non-Current)
Deferred Outflows of Resources
Liabilities (Current & Non-Current)
Deferred Inflows of Resources

21

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

22

How is infrastructure reported on a governmental Statement of Net Assets?

Modified approach:

Reported at cost; no accumulated depreciation

23

How is a Statement of Net Assets divided?

Into Governmental Activities and Business Activities

24

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.

25

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

26

What Financial Statements are required for Defined Benefit Pension plans?

Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position

27

What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?

Assets; Deferred Outfows; Liabilities; Deferred Outflows; Fiduciary Net Position

28

What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?

Additions (Contributions and Net Investment Income) - Deductions (Benefits Payments and Admin Expense) : Net Change in Fiduciary Net Position

29

What should be included in the Financial Statement notes for Defined Benefit Pension Plans?

Types of Benefits; Plan Member Classes; Board Information; Investment Policies and FV Determination

30

What is the primary objective of accounting?

To measure income

31

What is the most authoritative set of accounting pronouncements?

The FASB Codification

All pronouncements fall under the Codification umbrella

32

What are the 2 Levels of Authority within the FASB codification?

Authoritative and Non-Authoritative

33

How does managerial accounting differ from financial accounting?

Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP

34

Which financial reports are required to be filed with the SEC?

Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed

35

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

36

What are the Primary Constraints of Financial Reporting?

Cost vs. Benefit

Materiality

37

What are the Secondary Constraints of Financial Reporting?

Consistency - Year vs. Year

Comparability - Company vs. Company

38

What are the Qualitative Characteristics of Financial Reporting?

Relevance & Faithful Representation

Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions

Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions


39

What are the Enhancing Qualitative Characteristics of Financial Reporting?

Comparability Verifiability Timeliness and Understandability

Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand

40

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

41

What is an accrual?

Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet

42

What is a deferral?

Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)

43

What is recognition in accounting?

When an item is recorded and included in the financial statements

44

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

45

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

46

What items are included in a Level 1 input in the fair value hierarchy?

Price quotes or market prices

For example NYSE or NASDAQ

47

What items are included in a Level 2 valuation input?

Interest rates

Prime rate

48

What items are included in Level 3 inputs of the fair value hierarchy?

Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation

49

What are acceptable valuation techniques 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

50

What are current assets?

Cash

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

51

What are current liabilities?

Liabilities that will use current assets during the present operating cycle

52

What is an accrued liability?

Expense that has been incurred but not paid

Example: rents payable

53

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

54

When are revenues recognized?

When they have been earned; i.e. company has performed

55

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

56

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

57

What is an operating cycle?

Average time it takes to turn materials or services into Cash

58

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

59

What is historical cost?

How much an asset cost - (net of depreciation and amortization)

60

What is replacement cost?

How much it would cost to reacquire an asset today (Entrance Cost)

61

What is a market cost?

The sale price of an asset (Exit Cost)

62

What is Net Realizable Value?

Sale Price of an Asset - Selling/Disposal Fee

63

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

64

When is revenue recognized in an installment sale?

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

65

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

66

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

67

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

68

How are franchise revenues recorded?

Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized

69

How do you calculate sales revenue starting from cash basis income?

Mnemonic: SPEAR-BAR

Sales (i.e. Customer Payments)
+ Ending Accounts Receivable
- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis

70

How do you calculate COGS starting from Cash Basis?

Mnemonic: CRAP-I

Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis

71

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

72

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

73

What is constant dollar accounting?

Adjusts assets to reflect a consistent level of purchasing power due to inflation

Uses the Consumer Price Index (CPI)

74

When are expenses recognized?

When they are incurred. Accrue if not yet paid.

75

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

76

When should impaired assets be written down to fair value and expensed?

Immediately.

77

What major items should be classified under General & Administrative (G&A) expenses?

Office staff salaries

Office/building rent

Office supplies

Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense not G&A

78

What are business start-up costs?

One-time costs for opening a new business

Expensed as they are incurred

79

When is interest *not* expensed?

Interest on projects (software) for internal use is not expensed but is instead capitalized

80

What are the major components of Comprehensive Income?

Net Income + Other Comprehensive Income (OCI):

Revenues/Expenses

Gains/Losses

Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity

81

What items are considered cumulative accounting adjustments?

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

82

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

83

Where is Comprehensive Income reported?

Reported in a Single or Combined Income Statement

84

What disclosures on accounting policies are required in financial statements?

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

85

What are some major risks and uncertainties that must be disclosed?

Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability

86

How is a Capital Lease recorded?

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

87

What footnote disclosures are required for a Capital Lease?

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

88

What are the requirements for a Capital Lease for a lessor?

Same as for lessee (Title- BPO or Substance)- PLUS:

Collectability of lease payments is predictable

No uncertainties about the lessor reimbursing the lessee for costs incurred

89

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.

90

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

91

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

92

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

93

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

94

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

95

What are the characteristics of a Capital Lease for a lessee?

Risk of ownership passes to lessee by:
Title,
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

96

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.

97

When is APIC recorded on a stock subscription?

APIC increases on date subscription is recorded - not on the date paid for or issued

98

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.

99

When are dividends in arrear recorded for cumulative preferred stock?

They are not accrued until declared.

100

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.

101

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

102

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

103

When is Retained Earnings debited for FMV of Stock for a stock dividend?

When Stock Dividend is less than 25% of Common Stock outstanding

104

When is Retained Earnings debited for Par Value for a stock dividend?

When Stock Dividend is greater than 25% of common stock outstanding

105

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

106

What is the affect on APIC from a stock split?

Stock splits only affect par value - APIC remains the same.

107

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

108

What interest rate is used to discount stock options?

The risk-free interest rate

109

What date is used as the measurement date for share-based payments classified as liabilities?

The settlement date.

110

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

111

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

112

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

113

How is return on Common Stockholder's Equity calculated?

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

114

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

115

How is the dividend per share payout ratio calculated?

Dividends per share / earnings per share

116

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.

117

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

118

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

119

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

120

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

121

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

122

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

123

What items are included in Financing Activities in a Statement of Cash Flows?

Cash received: Issuance of Stock- Issuance of Debt

Cash paid: Dividends

124

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

125

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

126

How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

Calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability

127

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

128

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%)

129

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.

130

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)

131

What are the major classifications found on a Statement of Financial Position?

Similar to Balance Sheet:

Assets
Liabilities
Net Assets
Unrestricted Assets
Permanently Restricted Assets
Temporarily Restricted Assets

132

What are the major classifications in a Statement of Activities?

Similar to an Income Statement - organization - wide:

Revenues
Expenses - ONLY deducted from Unrestricted Revenues
Gains and Losses
Changes in Net Asset classes
Unrestricted
Permanently Restricted
Temporarily Restricted

133

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

Investing Activities

Financing Activities - Endowments and restricted contributions


134

Which organizations are required to present a Statement of Functional Expenses?

Volunteer Health Organizations

135

Which statements are required for non - governmental hospitals?

Balance Sheet
Statement of Operations
Statement of Changes in Net Assets
Statement of Cash Flows
Financial Statement Notes

136

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

137

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

138

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

139

When are services rendered considered contributions?

If the organization would have otherwise paid for them

or

They increase the value of a non - monetary asset

140

Is hospital charity care revenue?

NO.

It is disclosed in the notes to the financial statements only.

141

How are unconditional pledges to contribute recorded?

Classified as revenue in the current year only - multi - year future contributions fall under Temporarily Restricted.

142

Which revenues are expenses deducted from?

Expenses ONLY deducted from Unrestricted Revenues - not Temporary or Permanently Restricted Revenues/Assets

143

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

144

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

145

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

146

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.

147

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

148

How are investments recorded and valued in not - for - profit accounting?

Fair Value is mostly used

Exception - Equity method used when significant influence exists

149

How are scholarships recorded?

As a reduction of revenue - netted against college's tuition

150

How is depreciation expense recorded by a not - for - profit?

Depreciation expense is allocated proportionately to various functions

151

How are Available-For-Sale securities recorded on the Balance Sheet?

At Fair value as either Current or Non-current assets.

152

How are Available-For-Sale security Unrealized G/L treated?

Included in OCI (Other Comprehensive Income)

153

How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?

HTM - Stockholder's Equity
/ Trading Securities - Current Period.

154

How are Held-to-Maturity securities recorded on the Balance Sheet?

Amortized cost as Current or Non-current assets.

If reclassified as AFS - Unrealized G/L go to Stockholder's Equity

If reclassified as Trading Securities - Unrealized G/L recognized in Current Period

155

How are Held-to-Maturity securities Unrealized G/L treated?

Trick question - Unrealized gains or losses are not applicable because they are HTM


156

How are Trading Securities recorded on the Balance Sheet?

At Fair Value as a Current Asset

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.

157

How are Trading Securities Unrealized G/L treated?

Recorded on the Income Statement

If they are reclassified as HTM or AFS - there is no effect upon transfer.

158

Which costs are inventoriable?

Purchases - Net of Discounts, Freight, Warehouse expenditures

159

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

160

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

161

Which costs are non-inventoriable?

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

162

When are discounts recorded under the gross method?

Under the gross method, discounts are recorded only when used.

163

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.

164

How is gross margin calculated?

Gross Margin : Sales - COGS (BI + P - EI)

165

Describe the periodic inventory system.

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

166

Describe the perpetual inventory system.

Inventory count continually updated

Uses a moving-average cost flow method

167

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.

168

How is inventory turnover calculated?

COGS / Average Inventory

169

How is Average Day's Sales in inventory calculated?

365 / Inventory Turnover

170

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.

171

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.

172

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.

173

How does misstatement of ending inventory effect Ending Retained Earnings?

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

174

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

175

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

176

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

COGAS / Total Units : Weighted Average Cost Per Unit

177

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.

178

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

179

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

180

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

181

Which organization's standards are the most authoritative in the hierarchy of international accounting?

The International Accounting Standards Board (IASB)

182

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

183

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

184

What is the objective of the IFRS framework?

To provide users with information on international accounting.

185

Which assumptions are followed within the IRFS framework?

Entity is a Going Concern
Entity uses the accrual basis of accounting.

186

What are the Qualitative Characteristics of accounting information within IFRS?

Relevance & Faithful Representation

Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions

Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions

187

What are the Enhancing Characteristics of IFRS?

Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand

188

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.

189

What is the Pervasive Constraint within IFRS?

Cost vs. Benefit

190

Which items are considered reporting elements under IFRS?

Asset
Liability
Equity
Income
Expense

191

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.

192

When transitioning to IFRS what type of financial statement must be produced for the first reporting period?

A full comparative statement using IFRS.

193

If IFRS was implemented in June 2012 for use in the December 31 2012 financial statements what is the Date of Transition?

January 1 2011 because a full year of comparative statements is required from the previous year

194

For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?

The Fair Value election

195

Where on the financial statements are adjustments for adopting to IFRS made?

In the entity's retained earnings or equity

196

How is going concern different under IFRS than from GAAP?

Going Concern is an assumption under IFRS

197

How are extraordinary items treated under IFRS?

IFRS doesn't allow extraordinary items.

198

How is the completed contract method used under IFRS?

Completed contract method is not allowed under IFRS.

199

How is LIFO treated under IFRS?

IFRS does not allow LIFO.

200

Which financial statements are required under IFRS?

Statement of Comprehensive Income

Statement of Changes in Equity

201

How is the term income used in IFRS?

Income is used instead of revenue and encompasses BOTH revenue and gains.

202

How is the term profit used in IFRS?

In IFRS the term profit is used instead of Net Income.

203

How does IFRS treat gains?

They are treated the same as revenue and are not separated on the financial statements.

204

How does IFRS treat losses?

In IFRS losses are treated the same as expenses but they ARE separated on the financial statements.

205

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.

206

How do contingent liabilities differ between GAAP and IFRS?

Under GAAP there are three classifications of contingent liabilities - Probable Reasonably Possible and Remote.

Under IFRS contingencies are uncertain future events and are classified as a provision if probable and measurable even if uncertain in timing or amount.

207

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

Amortized Cost
*Using Effective Interest Method

208

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.

209

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

210

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)

211

Which items are recorded on the Income Statement in IFRS?

Income
Finance Costs
Tax Expense
Discontinued Ops
Profit/Loss
Non-controlling interest in Profit/Loss
Net profit/loss attributable from equity

212

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

213

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

214

How is investment property reported under IFRS?

Initially recorded at cost

Revalued using either Fair Value model or Cost model

215

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

216

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

217

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

218

How are intangible assets valued under IFRS?

Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss)

or

the Revaluation Model (Fair Value less Accumulated Depreciation)

219

How is internally generated goodwill reported under IFRS?

It is not recognized.

220

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.

221

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

222

How are defined benefit plans recorded under IFRS?

Project-unit-credit method calculates the PV of the defined benefit obligation

223

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

224

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.

225

How are Research and Development costs recorded?

They are expensed in the period incurred and are not capitalized.

226

Which expenditures are included in the cost of a building?

All expenditures to get the building into working condition are ready for use

227

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

228

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.

229

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.

230

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 afair and then donating the property which is then recorded atfair value

231

How is donation of property recorded by the donor?

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.

232

How is double-declining balance (DDB) depreciation calculated?

1 / (Useful Life x 2 x Book Value)

Ignore salvage value.

233

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

234

How is straight line depreciation calculated?

(Cost - Salvage Value) / Useful life : depreciation expense

235

When is an asset considered to be impaired? How is impairment loss calculated?

When the un-discounted 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

236

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.

237

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.

238

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.

239

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
Shipping
Taxes
Insurance
Installation
Testing
Legal fees
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.

240

Which Personal Financial Statements are required?

Statement of Financial Condition & Statement of Changes in Net Worth

241

How are assets and liabilities valued in a Personal Financial Statement?

Estimated current value

242

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

243

What is the general presentation on a statement of financial condition?

Assets
- Liabilities
- Estimated taxes on assets sold
: Net Worth

244

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

245

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

246

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.

247

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

248

How are discontinued operations & extraordinary items reported in Interim Financial Statements?

Aren't prorated

Fully recognized in Interim Period as incurred

If it occurs in Q3 - it's recognized in Q3

249

How are cumulative gains and losses reported in Interim Financials?

Reported as if they occurred in the first quarter

250

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

251

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

252

For whom is Segment Reporting required?

Publicly traded companies

253

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

254

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

255

How are derivatives recorded?

At cost when acquired re-valued to fair value each period on Balance Sheet.

256

How are unrealized gains/losses on trading securities recorded?

Recorded on income statement

257

How are gains and losses on Available for Sale (AFS) securities recorded?

They are included in Other Comprehensive Income.

258

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

259

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.

260

Where are gains and losses on foreign currency hedges recorded?

In Other Comprehensive Income (OCI)

261

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

262

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

263

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.

264

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.

265

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

266

Where are re-measurement gains and losses due to foreign currency translation reported?

On the income statement as Other Income.

267

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

268

What is a deferred tax asset?

Deduction will reduce future income taxes expense.

269

What is a deferred tax liability?

Income will be taxable in a future period and will increase future tax expense

270

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.

271

What valuation allowance is used with respect to a deferred tax asset?

If it isprobable 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

272

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

273

What is deferred income tax expense?

The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities

GAAP Method for calculating is theAsset and Liability Approach

Note: IFRS uses the Liability approach only

274

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 fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet

275

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, pre-paids, and short-term investments

276

What is a current liability?

A liability expected to be paid within 12 months or less

277

How is the Quick Ratio calculated?

(Cash + A/R + Trading Securities) / Current Liabilities

278

How is the Current Ratio calculated?

Currents Assets / Current Liabilities

279

How is Working Capital calculated?

Currents Assets - Current Liabilities

280

How is A/R Turnover calculated?

Credit Sales / Average A/R

281

How is Inventory Turnover calculated?

COGS / Average Inventory

282

How is Day Sales in Inventory calculated?

365 / Inventory Turnover

283

How is Days to Collect A/R calculated?

Average A/R / Average Sales per Day

284

How are gain contingencies recorded?

They are NOT accrued due to Conservatism

285

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

286

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

287

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

288

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 inter-company sales of inventory & PPE; also inter-company investments

289

When is consolidation not required?

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

290

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

291

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

292

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

293

What is a serial bond?

Any bond that matures in installments

294

What is a term bond?

Any bond that matures on a single date

295

What is a debenture bond?

A bond not secured by any collateral

296

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

297

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

298

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)

299

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

300

How are bonds reported when classified as trading securities?

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

301

How are bonds amortized under the interest method?

Both discount and premium amortization amounts increase each year

302

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

303

What is the stated rate for a bond?

Rate on the face of the bond

304

What is the market rate on a bond?

Rate that bonds are currently selling for

305

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

306

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

307

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.

308

When does interest expense start accruing on a bond?

When the bonds are issued

309

How is an interest payment on a bond calculated?

Cash for payment : Stated rate x Face amount

310

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

311

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

312

How is the retirement of bonds recorded?

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

313

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

314

What is the gain recognized under a settlement of debt?

Gain recognized:

Difference between cash paid and carrying amount of debt

Difference between non-cash asset given and re-valued at FMV and debt carrying amount

315

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

316

How are changes in accounting principle applied?

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

317

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.

318

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.

319

How is a change in accounting estimate applied?

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

No backwards adjustment is made.

320

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.

321

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.

322

What are the requirements for a prior period adjustment?

Effect is Material

Is identifiable in Prior Period

Couldn't be estimated in Prior Periods

323

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

324

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.

325

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

326

What are the three major types of funds in governmental accounting?

Governmental, Proprietary, Fiduciary

327

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)

328

What is a budget appropriation?

The highest amount allowed for a particular expenditure under a budget.

329

What is an encumbrance?

Records purchase and reserves it for the encumbrance.

330

What is the opening budgetary entry?

Dr Estimated Revenues Control
Cr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)

331

What is the closing budgetary entry?

Dr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Cr Estimated Revenues Control

332

What are the types of governmental funds?

General Fund
Special Revenue Fund
Permanent Fund
Capital Projects Fund
Debt Service Fund

333

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

334

What is a Special Revenue Fund?

Restricted for a specific purpose such as street repair.

335

What is a Permanent Fund?

Legally restricted fund; where only earnings can be used to fund programs.

Principal remains intact.

336

What is a Capital Projects Fund?

Used to acquire and build facilities.

337

What is a Debt Service Fund?

Handles repayment of long-term debt and related interest.

338

Which fund statements are issued in Governmental Accounting?

Balance Sheet

Statement of Revenues; Expenditures; and Changes in Fund Balance

339

When is Revenue recorded in Governmental Accounting?

When it is BOTH available and measurable; regardless of when it is spent.

340

What is Derived Tax Revenue?

Money collected from people doing things:

Sales tax (buying cars) or income tax (people working)

341

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.

342

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)

343

What are the Fund Balance Types?

Restricted - Restricted by Contributor
Committed - Restricted by Government
Assigned - Intended for a purpose
Unassigned - Available to be spent
Non-spendable - Not in a spendable state

344

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

345

How are Assets & Liabilities presented on the Statement of Net Position?

Assets (Current & Non-Current)
Deferred Outflows of Resources
Liabilities (Current & Non-Current)
Deferred Inflows of Resources

346

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

347

How is infrastructure reported on a governmental Statement of Net Assets?

Modified approach:

Reported at cost; no accumulated depreciation

348

How is a Statement of Net Assets divided?

Into Governmental Activities and Business Activities

349

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.

350

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

351

What Financial Statements are required for Defined Benefit Pension plans?

Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position

352

What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?

Assets; Deferred Outfows; Liabilities; Deferred Outflows; Fiduciary Net Position

353

What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?

Additions (Contributions and Net Investment Income) - Deductions (Benefits Payments and Admin Expense) : Net Change in Fiduciary Net Position

354

What should be included in the Financial Statement notes for Defined Benefit Pension Plans?

Types of Benefits; Plan Member Classes; Board Information; Investment Policies and FV Determination

355

What are the three major types of funds in governmental accounting?

Governmental, Proprietary, Fiduciary

356

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)

357

What is a budget appropriation?

The highest amount allowed for a particular expenditure under a budget.

358

What is an encumbrance?

Records purchase and reserves it for the encumbrance.

359

What is the opening budgetary entry?

Dr Estimated Revenues Control
Cr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)

360

What is the closing budgetary entry?

Dr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Cr Estimated Revenues Control

361

What are the types of governmental funds?

General Fund
Special Revenue Fund
Permanent Fund
Capital Projects Fund
Debt Service Fund

362

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

363

What is a Special Revenue Fund?

Restricted for a specific purpose such as street repair.

364

What is a Permanent Fund?

Legally restricted fund; where only earnings can be used to fund programs.

Principal remains intact.

365

What is a Capital Projects Fund?

Used to acquire and build facilities.

366

What is a Debt Service Fund?

Handles repayment of long-term debt and related interest.

367

Which fund statements are issued in Governmental Accounting?

Balance Sheet

Statement of Revenues; Expenditures; and Changes in Fund Balance

368

When is Revenue recorded in Governmental Accounting?

When it is BOTH available and measurable; regardless of when it is spent.

369

What is Derived Tax Revenue?

Money collected from people doing things:

Sales tax (buying cars) or income tax (people working)

370

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.

371

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)

372

What are the Fund Balance Types?

Restricted - Restricted by Contributor
Committed - Restricted by Government
Assigned - Intended for a purpose
Unassigned - Available to be spent
Non-spendable - Not in a spendable state

373

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

374

How are Assets & Liabilities presented on the Statement of Net Position?

Assets (Current & Non-Current)
Deferred Outflows of Resources
Liabilities (Current & Non-Current)
Deferred Inflows of Resources

375

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

376

How is infrastructure reported on a governmental Statement of Net Assets?

Modified approach:

Reported at cost; no accumulated depreciation

377

How is a Statement of Net Assets divided?

Into Governmental Activities and Business Activities

378

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.

379

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

380

What Financial Statements are required for Defined Benefit Pension plans?

Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position

381

What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?

Assets; Deferred Outfows; Liabilities; Deferred Outflows; Fiduciary Net Position

382

What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?

Additions (Contributions and Net Investment Income) - Deductions (Benefits Payments and Admin Expense) : Net Change in Fiduciary Net Position

383

What should be included in the Financial Statement notes for Defined Benefit Pension Plans?

Types of Benefits; Plan Member Classes; Board Information; Investment Policies and FV Determination

384

What is the primary objective of accounting?

To measure income

385

What is the most authoritative set of accounting pronouncements?

The FASB Codification

All pronouncements fall under the Codification umbrella

386

What are the 2 Levels of Authority within the FASB codification?

Authoritative and Non-Authoritative

387

How does managerial accounting differ from financial accounting?

Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP

388

Which financial reports are required to be filed with the SEC?

Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed

389

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

390

What are the Primary Constraints of Financial Reporting?

Cost vs. Benefit

Materiality

391

What are the Secondary Constraints of Financial Reporting?

Consistency - Year vs. Year

Comparability - Company vs. Company

392

What are the Qualitative Characteristics of Financial Reporting?

Relevance & Faithful Representation

Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions

Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions


393

What are the Enhancing Qualitative Characteristics of Financial Reporting?

Comparability Verifiability Timeliness and Understandability

Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand

394

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

395

What is an accrual?

Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet

396

What is a deferral?

Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)

397

What is recognition in accounting?

When an item is recorded and included in the financial statements

398

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

399

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

400

What items are included in a Level 1 input in the fair value hierarchy?

Price quotes or market prices

For example NYSE or NASDAQ

401

What items are included in a Level 2 valuation input?

Interest rates

Prime rate

402

What items are included in Level 3 inputs of the fair value hierarchy?

Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation

403

What are acceptable valuation techniques 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

404

What are current assets?

Cash

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

405

What are current liabilities?

Liabilities that will use current assets during the present operating cycle

406

What is an accrued liability?

Expense that has been incurred but not paid

Example: rents payable

407

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

408

When are revenues recognized?

When they have been earned; i.e. company has performed

409

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

410

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

411

What is an operating cycle?

Average time it takes to turn materials or services into Cash

412

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

413

What is historical cost?

How much an asset cost - (net of depreciation and amortization)

414

What is replacement cost?

How much it would cost to reacquire an asset today (Entrance Cost)

415

What is a market cost?

The sale price of an asset (Exit Cost)

416

What is Net Realizable Value?

Sale Price of an Asset - Selling/Disposal Fee

417

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

418

When is revenue recognized in an installment sale?

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

419

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

420

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

421

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

422

How are franchise revenues recorded?

Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized

423

How do you calculate sales revenue starting from cash basis income?

Mnemonic: SPEAR-BAR

Sales (i.e. Customer Payments)
+ Ending Accounts Receivable
- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis

424

How do you calculate COGS starting from Cash Basis?

Mnemonic: CRAP-I

Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis

425

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

426

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

427

What is constant dollar accounting?

Adjusts assets to reflect a consistent level of purchasing power due to inflation

Uses the Consumer Price Index (CPI)

428

When are expenses recognized?

When they are incurred. Accrue if not yet paid.

429

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

430

When should impaired assets be written down to fair value and expensed?

Immediately.

431

What major items should be classified under General & Administrative (G&A) expenses?

Office staff salaries

Office/building rent

Office supplies

Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense not G&A

432

What are business start-up costs?

One-time costs for opening a new business

Expensed as they are incurred

433

When is interest *not* expensed?

Interest on projects (software) for internal use is not expensed but is instead capitalized

434

What are the major components of Comprehensive Income?

Net Income + Other Comprehensive Income (OCI):

Revenues/Expenses

Gains/Losses

Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity

435

What items are considered cumulative accounting adjustments?

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

436

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

437

Where is Comprehensive Income reported?

Reported in a Single or Combined Income Statement

438

What disclosures on accounting policies are required in financial statements?

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

439

What are some major risks and uncertainties that must be disclosed?

Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability

440

How is a Capital Lease recorded?

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

441

What footnote disclosures are required for a Capital Lease?

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

442

What are the requirements for a Capital Lease for a lessor?

Same as for lessee (Title- BPO or Substance)- PLUS:

Collectability of lease payments is predictable

No uncertainties about the lessor reimbursing the lessee for costs incurred

443

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.

444

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

445

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

446

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

447

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

448

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

449

What are the characteristics of a Capital Lease for a lessee?

Risk of ownership passes to lessee by:
Title,
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

450

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.

451

When is APIC recorded on a stock subscription?

APIC increases on date subscription is recorded - not on the date paid for or issued

452

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.

453

When are dividends in arrear recorded for cumulative preferred stock?

They are not accrued until declared.

454

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.

455

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

456

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

457

When is Retained Earnings debited for FMV of Stock for a stock dividend?

When Stock Dividend is less than 25% of Common Stock outstanding

458

When is Retained Earnings debited for Par Value for a stock dividend?

When Stock Dividend is greater than 25% of common stock outstanding

459

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

460

What is the affect on APIC from a stock split?

Stock splits only affect par value - APIC remains the same.

461

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

462

What interest rate is used to discount stock options?

The risk-free interest rate

463

What date is used as the measurement date for share-based payments classified as liabilities?

The settlement date.

464

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

465

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

466

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

467

How is return on Common Stockholder's Equity calculated?

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

468

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

469

How is the dividend per share payout ratio calculated?

Dividends per share / earnings per share

470

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.

471

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

472

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

473

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

474

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

475

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

476

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

477

What items are included in Financing Activities in a Statement of Cash Flows?

Cash received: Issuance of Stock- Issuance of Debt

Cash paid: Dividends

478

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

479

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

480

How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

Calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability

481

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

482

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%)

483

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.

484

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)

485

What are the major classifications found on a Statement of Financial Position?

Similar to Balance Sheet:

Assets
Liabilities
Net Assets
Unrestricted Assets
Permanently Restricted Assets
Temporarily Restricted Assets

486

What are the major classifications in a Statement of Activities?

Similar to an Income Statement - organization - wide:

Revenues
Expenses - ONLY deducted from Unrestricted Revenues
Gains and Losses
Changes in Net Asset classes
Unrestricted
Permanently Restricted
Temporarily Restricted

487

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

Investing Activities

Financing Activities - Endowments and restricted contributions


488

Which organizations are required to present a Statement of Functional Expenses?

Volunteer Health Organizations

489

Which statements are required for non - governmental hospitals?

Balance Sheet
Statement of Operations
Statement of Changes in Net Assets
Statement of Cash Flows
Financial Statement Notes

490

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

491

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

492

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

493

When are services rendered considered contributions?

If the organization would have otherwise paid for them

or

They increase the value of a non - monetary asset

494

Is hospital charity care revenue?

NO.

It is disclosed in the notes to the financial statements only.

495

How are unconditional pledges to contribute recorded?

Classified as revenue in the current year only - multi - year future contributions fall under Temporarily Restricted.

496

Which revenues are expenses deducted from?

Expenses ONLY deducted from Unrestricted Revenues - not Temporary or Permanently Restricted Revenues/Assets

497

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

498

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

499

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

500

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.

501

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

502

How are investments recorded and valued in not - for - profit accounting?

Fair Value is mostly used

Exception - Equity method used when significant influence exists

503

How are scholarships recorded?

As a reduction of revenue - netted against college's tuition

504

How is depreciation expense recorded by a not - for - profit?

Depreciation expense is allocated proportionately to various functions

505

How are Available-For-Sale securities recorded on the Balance Sheet?

At Fair value as either Current or Non-current assets.

506

How are Available-For-Sale security Unrealized G/L treated?

Included in OCI (Other Comprehensive Income)

507

How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?

HTM - Stockholder's Equity
/ Trading Securities - Current Period.

508

How are Held-to-Maturity securities recorded on the Balance Sheet?

Amortized cost as Current or Non-current assets.

If reclassified as AFS - Unrealized G/L go to Stockholder's Equity

If reclassified as Trading Securities - Unrealized G/L recognized in Current Period

509

How are Held-to-Maturity securities Unrealized G/L treated?

Trick question - Unrealized gains or losses are not applicable because they are HTM


510

How are Trading Securities recorded on the Balance Sheet?

At Fair Value as a Current Asset

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.

511

How are Trading Securities Unrealized G/L treated?

Recorded on the Income Statement

If they are reclassified as HTM or AFS - there is no effect upon transfer.

512

Which costs are inventoriable?

Purchases - Net of Discounts, Freight, Warehouse expenditures

513

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

514

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

515

Which costs are non-inventoriable?

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

516

When are discounts recorded under the gross method?

Under the gross method, discounts are recorded only when used.

517

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.

518

How is gross margin calculated?

Gross Margin : Sales - COGS (BI + P - EI)

519

Describe the periodic inventory system.

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

520

Describe the perpetual inventory system.

Inventory count continually updated

Uses a moving-average cost flow method

521

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.

522

How is inventory turnover calculated?

COGS / Average Inventory

523

How is Average Day's Sales in inventory calculated?

365 / Inventory Turnover

524

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.

525

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.

526

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.

527

How does misstatement of ending inventory effect Ending Retained Earnings?

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

528

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

529

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

530

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

COGAS / Total Units : Weighted Average Cost Per Unit

531

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.

532

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

533

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

534

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

535

Which organization's standards are the most authoritative in the hierarchy of international accounting?

The International Accounting Standards Board (IASB)

536

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

537

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

538

What is the objective of the IFRS framework?

To provide users with information on international accounting.

539

Which assumptions are followed within the IRFS framework?

Entity is a Going Concern
Entity uses the accrual basis of accounting.

540

What are the Qualitative Characteristics of accounting information within IFRS?

Relevance & Faithful Representation

Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions

Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions

541

What are the Enhancing Characteristics of IFRS?

Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand

542

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.

543

What is the Pervasive Constraint within IFRS?

Cost vs. Benefit

544

Which items are considered reporting elements under IFRS?

Asset
Liability
Equity
Income
Expense

545

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.

546

When transitioning to IFRS what type of financial statement must be produced for the first reporting period?

A full comparative statement using IFRS.

547

If IFRS was implemented in June 2012 for use in the December 31 2012 financial statements what is the Date of Transition?

January 1 2011 because a full year of comparative statements is required from the previous year

548

For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?

The Fair Value election

549

Where on the financial statements are adjustments for adopting to IFRS made?

In the entity's retained earnings or equity

550

How is going concern different under IFRS than from GAAP?

Going Concern is an assumption under IFRS

551

How are extraordinary items treated under IFRS?

IFRS doesn't allow extraordinary items.

552

How is the completed contract method used under IFRS?

Completed contract method is not allowed under IFRS.

553

How is LIFO treated under IFRS?

IFRS does not allow LIFO.

554

Which financial statements are required under IFRS?

Statement of Comprehensive Income

Statement of Changes in Equity

555

How is the term income used in IFRS?

Income is used instead of revenue and encompasses BOTH revenue and gains.

556

How is the term profit used in IFRS?

In IFRS the term profit is used instead of Net Income.

557

How does IFRS treat gains?

They are treated the same as revenue and are not separated on the financial statements.

558

How does IFRS treat losses?

In IFRS losses are treated the same as expenses but they ARE separated on the financial statements.

559

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.

560

How do contingent liabilities differ between GAAP and IFRS?

Under GAAP there are three classifications of contingent liabilities - Probable Reasonably Possible and Remote.

Under IFRS contingencies are uncertain future events and are classified as a provision if probable and measurable even if uncertain in timing or amount.

561

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

Amortized Cost
*Using Effective Interest Method

562

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.

563

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

564

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)

565

Which items are recorded on the Income Statement in IFRS?

Income
Finance Costs
Tax Expense
Discontinued Ops
Profit/Loss
Non-controlling interest in Profit/Loss
Net profit/loss attributable from equity

566

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

567

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

568

How is investment property reported under IFRS?

Initially recorded at cost

Revalued using either Fair Value model or Cost model

569

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

570

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

571

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

572

How are intangible assets valued under IFRS?

Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss)

or

the Revaluation Model (Fair Value less Accumulated Depreciation)

573

How is internally generated goodwill reported under IFRS?

It is not recognized.

574

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.

575

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

576

How are defined benefit plans recorded under IFRS?

Project-unit-credit method calculates the PV of the defined benefit obligation

577

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

578

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.

579

How are Research and Development costs recorded?

They are expensed in the period incurred and are not capitalized.

580

Which expenditures are included in the cost of a building?

All expenditures to get the building into working condition are ready for use

581

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

582

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.

583

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.

584

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 afair and then donating the property which is then recorded atfair value

585

How is donation of property recorded by the donor?

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.

586

How is double-declining balance (DDB) depreciation calculated?

1 / (Useful Life x 2 x Book Value)

Ignore salvage value.

587

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

588

How is straight line depreciation calculated?

(Cost - Salvage Value) / Useful life : depreciation expense

589

When is an asset considered to be impaired? How is impairment loss calculated?

When the un-discounted 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

590

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.

591

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.

592

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.

593

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
Shipping
Taxes
Insurance
Installation
Testing
Legal fees
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.

594

Which Personal Financial Statements are required?

Statement of Financial Condition & Statement of Changes in Net Worth

595

How are assets and liabilities valued in a Personal Financial Statement?

Estimated current value

596

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

597

What is the general presentation on a statement of financial condition?

Assets
- Liabilities
- Estimated taxes on assets sold
: Net Worth

598

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

599

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

600

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.

601

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

602

How are discontinued operations & extraordinary items reported in Interim Financial Statements?

Aren't prorated

Fully recognized in Interim Period as incurred

If it occurs in Q3 - it's recognized in Q3

603

How are cumulative gains and losses reported in Interim Financials?

Reported as if they occurred in the first quarter

604

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

605

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

606

For whom is Segment Reporting required?

Publicly traded companies

607

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

608

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

609

How are derivatives recorded?

At cost when acquired re-valued to fair value each period on Balance Sheet.

610

How are unrealized gains/losses on trading securities recorded?

Recorded on income statement

611

How are gains and losses on Available for Sale (AFS) securities recorded?

They are included in Other Comprehensive Income.

612

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

613

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.

614

Where are gains and losses on foreign currency hedges recorded?

In Other Comprehensive Income (OCI)

615

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

616

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

617

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.

618

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.

619

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

620

Where are re-measurement gains and losses due to foreign currency translation reported?

On the income statement as Other Income.

621

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

622

What is a deferred tax asset?

Deduction will reduce future income taxes expense.

623

What is a deferred tax liability?

Income will be taxable in a future period and will increase future tax expense

624

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.

625

What valuation allowance is used with respect to a deferred tax asset?

If it isprobable 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

626

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

627

What is deferred income tax expense?

The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities

GAAP Method for calculating is theAsset and Liability Approach

Note: IFRS uses the Liability approach only

628

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 fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet

629

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, pre-paids, and short-term investments

630

What is a current liability?

A liability expected to be paid within 12 months or less

631

How is the Quick Ratio calculated?

(Cash + A/R + Trading Securities) / Current Liabilities

632

How is the Current Ratio calculated?

Currents Assets / Current Liabilities

633

How is Working Capital calculated?

Currents Assets - Current Liabilities

634

How is A/R Turnover calculated?

Credit Sales / Average A/R

635

How is Inventory Turnover calculated?

COGS / Average Inventory

636

How is Day Sales in Inventory calculated?

365 / Inventory Turnover

637

How is Days to Collect A/R calculated?

Average A/R / Average Sales per Day

638

How are gain contingencies recorded?

They are NOT accrued due to Conservatism

639

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

640

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

641

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

642

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 inter-company sales of inventory & PPE; also inter-company investments

643

When is consolidation not required?

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

644

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

645

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

646

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

647

What is a serial bond?

Any bond that matures in installments

648

What is a term bond?

Any bond that matures on a single date

649

What is a debenture bond?

A bond not secured by any collateral

650

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

651

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

652

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)

653

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

654

How are bonds reported when classified as trading securities?

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

655

How are bonds amortized under the interest method?

Both discount and premium amortization amounts increase each year

656

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

657

What is the stated rate for a bond?

Rate on the face of the bond

658

What is the market rate on a bond?

Rate that bonds are currently selling for

659

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

660

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

661

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.

662

When does interest expense start accruing on a bond?

When the bonds are issued

663

How is an interest payment on a bond calculated?

Cash for payment : Stated rate x Face amount

664

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

665

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

666

How is the retirement of bonds recorded?

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

667

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

668

What is the gain recognized under a settlement of debt?

Gain recognized:

Difference between cash paid and carrying amount of debt

Difference between non-cash asset given and re-valued at FMV and debt carrying amount

669

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

670

How are changes in accounting principle applied?

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

671

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.

672

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.

673

How is a change in accounting estimate applied?

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

No backwards adjustment is made.

674

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.

675

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.

676

What are the requirements for a prior period adjustment?

Effect is Material

Is identifiable in Prior Period

Couldn't be estimated in Prior Periods

677

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

678

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.

679

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