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IFRS & GAAP Characteristic-Relevance

Relevance is a Qualitative Characteristic of Financial Reporting:
-Makes a difference to user (Materiality)
-Predictive Value – Predicts Future Trends
-Confirmatory Value – Evaluates Past


IFRS & GAAP Characteristic-Faithful Representation

Faithful Representation is a Qualitative Characteristic of Financial Reporting:
-Complete: Nothing omitted that would impact the decision making of the user
-Neutral: Info is presented without bias
-Free from Error: No material errors or omissions


IFRS & GAAP 4 Enhancing Characteristics

o Comparability-Allows users to compare different items
among various periods
o Understandability-Easy to use and understand
o Verifiability-Different people would reach same conclusion
o Timeliness- Information is available in time to make a decision


Pervasive Constraint of IFRS

Cost vs. Benefit


IFRS Criteria for an "element"

4. Income


IFRS Recognition for Balance Sheet & Income Statement (2 things)

1. Must meet the criteria for an Element (ALEIE)
2.Must meet criteria for recognition. (future benefit & reliably measured)


IFRS Criteria for "recognition"

1. Probable future economic benefit
2.Can be measured reliably-Cost Recovery method required if value or outcome cannot be measured reliably.


Under IFRS how are gains and losses reported

-Gains are not reported as separate to income.
-Losses are the same as expense, but ARE displayed separately.


Difference between GAAP and IFRS with it comes to refinancing liabilities.

-In order for a current liability to be classified as non-current the refinancing agreement must be EXECUTED under IFRS. Under GAAP the entity only has to show intent.


Define contigent liability

Contingent liabilities are liabilities that may be incurred by an entity depending on the outcome of an uncertain future event such as a court case.


Contigent Liabilities under IFRS:

Under IFRS a contigent liability is accrued "probable" and "measurable".

It is classified as a "Provision" is payment is uncertain in Timing or Amount.


Financial Assets under IFRS are recorded on the Statement of Financial Position using one of three methods:

o Amortized Cost
Objective: Collect Cash Flows
Uses Effective Interest Method
o Fair Value through OCI
Objective: Sell Financial Assets
Gain or Loss recognized in OCI
o Fair Value through Profit or Loss
Objective: Everything Else
Gain or Loss recognized in Profit or Loss


IFRS & GAAP-Deferred Tax Assets and Liabilities are classified as______ on the Statement of Financial Position.

Non-Current & Can only be netted if they are related to the same country/taxing authority.


Cost Method (Cost Model)

Asset carried at Cost less Accumulated Depreciation and Impairment Loss


Revaluation Model

-Asset is adjusted to Fair Value, less Accumulated Depreciation
-Increases in value from the adjustment are reported in the current period as Other Comprehensive Income
-Decreases in value from the adjustment are treated as an expense
-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


PP&E Under IFRS- Is recorded at Cost using one of what two options?

1.Cost Model
2.Revaluation Model


Under IFRS- How are Interest Expense or Finance Costs classified on the Statement of Cash Flows?

They can be classified as Operating or Financing. Once a classification is chosen, all future costs must be classified there.


Changes in Accounting Principle

-Retrospective Application
-Prior Periods adjusted
-Retained Earnings adjusted
-Completed Contract to % Completion


Change in Entity

-Retrospective Application
-Prior periods adjusted
-Included in footnotes
Ex: Change to Consolidated Statements


Change in Accounting Estimate

-Prospective Application
-Going Forward adjustment
Ex: Straight Line to DDB Depreciation


Error Correction

-Prior Periods adjusted
-Beginning balances of earliest period adjusted
-Included in footnotes
Ex: Non-GAAP to GAAP


Primary Objective of Accounting:

Measure Income-Income measures a firm's efficiency
**Monetary Units are the basis of all economic activity**


FASB Codification:

The most authoritative set of accounting pronouncements. All pronouncements fall under the Codification "umbrella"


Managerial Accounting

-Managerial Accounting is "Timeliness" focused
-Managerial Accounting does NOT follow GAAP


Primary Constraints of Financial Reporting

-Cost vs Benefit


Secondary Constraints of Financial Reporting

-Consistency: Year vs. Year
-Comparability: Company vs. Company



When an estimate is necessary due to uncertainty, conservatism chooses the best option that won’t overstate the financial position of the company


Fair Value characteristics:

o The price you would receive if you sold the asset o Assumes asset is at its highest and best value
o Market Assumes
Asset is sold in its most advantageous market to get the best price possible
-Buyer and Seller are not Related
-Buyer and Seller are Knowledgeable
-Buyer and Seller are able to transact
-This isn’t a hypothetical transaction for Fair Value measurement purposes
-Buyer actually has $10M to purchase
-Buyer and Seller are motivated to buy/sell


Acceptable Valuation Techniques (3)

1.Market Approach: market transactions/prices value asset
2.Income Approach: present value discount earnings
3.Cost Approach: replacement cost values the asset


Royalty Income

Royalty Income is recognized when earned. If royalty % is applied against Net Sales (Gross Sales-Estimated Returns) x %


Installment Sales

Revenue recognized upon receipt of cash. Only used when cash collection is uncertain.


Cost Recovery Method

-Most conservation method of revenue recognition when collection of sale price is uncertain
-No revenue recognized until all costs are recovered from purchase of the asset


Franchise Revenue

Franchisor-Startup Franchise Revenue deferred until performance takes place

Franchisee-Franchise Costs deferred until corresponding revenue is recognized


Discontinued Operations

Company ceases operating a business segment.
-Must represent a strategic shift
--Major effect on operations and financials


Unusual or Infrequent Items

-Formerly Extraordinary Items
-Two options for reporting: Income Statement (above income from Conti. Ops.) & Footnotes to Financials
-No longer Net-of-tax


Constant Dollar Accounting

Uses CPI to adjust assets to reflect a consistent level of purchasing power due to inflation


Interest Expense: Interest on projects...

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


What accounting policies must be disclosed?

o Includes;
-Accounting Principles used
-Basis of Consolidation
-Inventory Pricing Methods
-Depreciation Method
-Amortization of Intangibles


What risks and uncertainties must be disclosed?

-Nature of Operations
-Use of Estimates & listing of Significant Estimates
-Concentration vulnerability


Going Concerns-Not Alleviated

• Management plan – doubtful success
• Statement Required:
-There is substantial doubt that entity will continue as GC within 1 year of financial statement issuance date
• Disclosures Required:
• Events that led to GC Doubt
• Management evaluation of event
• Management plans to alleviate


Alternatives to GAAP Accounting

• Cash Basis-Not GAAP, Oaky for Tax Returns
• Modified Cash-Not GAAP, Avoids GAAP complexities while providing more info. than Cash Basis Accounting
• Income Tax Basis- 3 Options (Cash, Accrual, Hybrid)
• FRF for SMEs-Not GAAP, no authoritative status, developed by AICPA, simplifies reporting for small co.
• Public Business Entities Framework- developed by FASB, GAAP


Financial Reporting Framework for Small & Medium Sized-Entity Framework (FRF for SME):

o Developed by the AICPA
o Not GAAP
o Has No Authoritative Status
o Simplifies reporting for small companies
-Uses Historical Cost as measurement basis (instead of Fair Value)
-Targeted/Relevant Disclosures only o Provides efficiency and flexibility
o Reduces Book vs. Tax differences
o Income Taxes – Two Options
-Deferred Taxes Method
-Taxes Payable Method
o Startup Costs – Two Options
-Amortized (15 years)
o Goodwill
-Amortized (15 years)


Public Company Framework

o Developed by the FASB
o Small Company Lease Accounting
-Private companies can bypass Variable Interest Entity rules for Leases
-Instead, Lease disclosures are made
o Accounting for Goodwill
-Amortize Goodwill over 10 years
• Will reduce impairment likelihood
• Less than 10 if more appropriate
-Must test for impairment – Two Options
• Entity Level
• Reporting Unit Level
o Interest Rate Swaps
-Simplified Hedge Accounting approach
• Simplifies the process from moving from a variable-rate borrowing + interest rate swap to a fixed-rate borrowing


Regulation S-K

oUnder the Securities Act of 1933

oIncluded in the Regulation S-K
-General Business & Securities information
-Financial information
-Management and security holder information
-Registration Statement and Prospectus provisions
-Industry Guides, Exhibits & Asset-backed securities
-Roll-Up Transactions & Mergers
-Oil and Gas disclosures, if applicable


Development Stage Entities (DSE)

--A DSE is a company that is still in the formation stage and hasn’t yet begun principal operations or produced significant revenue
--New GAAP rules relax the reporting requirements for a DSE by removing the need for
o Incremental Financial Reporting
o Data Maintenance
o Inception-to-Date Reporting
o Attaching the DSE label to the F/S
o Disclose descriptions of DSE Activities
o Disclose first-year entity is no longer a DSE
--Benefit: Cost savings without sacrificing F/S usefulness


Serial Bond

Matures in installments


Term Bond

Matures on a Single Date


Debenture Bond



Sinking Fund Bonds

Cash held for Bond Repayment
Requires 5 years of Disclosures


Bond Proceeds Formula

Present Value of the Principal Payment at Maturity + Present Value of Interest Payments made
= Market Value of Bond Proceeds


Stated Rate

Rate on the face of the bond


Market Rate

Rate the bonds are currently selling for


Market Rate > Stated Rate

o 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
Market Rate: 12% Stated Rate: 10%
Par Value: $100
Purchase Price: $98


Market Rate < Stated Rate

o Bond will need to sell at a premium in order for sellers 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
Market Rate: 8%
Stated Rate: 10%
Par Value: $100
Purchase Price: $102


Bond Issuance between Interest Date

* Face x Stated Rate x Interest Accrued since last date

o If a company issues bonds between interest dates, then the total cash that they receive will be MORE than they normally would (set aside any considerations for premium or discount, they are irrelevant for this point).

o Purchaser of the bonds must give the bond issuer the amount of accrued interest up front


Interest Expense

-Interest Expense starts accruing when the bonds are issued – not with the face amount of the bonds
-The amount of interest expense debited is the Effective Yield x Carrying Value


Bond Amortization Methods

-Effective Interest Method of Amortization is GAAP
-Straight Line Amortization in NOT GAAP


Debt Restructure: Debtor-Modification of Terms

If future payments are now less than the carrying
amount of the debt, then a Gain is recognized


Debt Restructure: Debtor- Settlement

o Gain recognized
-Cash Paid - Carrying Amount
-Difference between non-cash asset given and re-valued at FMV and debt carrying amount


Debt Restructure: Creditor-Loan Impairment

o Future Cash Flows discounted at loan’s Effective
Interest Rate < Carrying Value
--Effective Rate calculated using Original Rate,
not Modified Rate


Equity Method

-21-50% Ownership
-Gives "Significant Influence"
-Purchase Price - Par Value=Good Will
-Dividends received from Investee reduce the investment account and are not income


Acquisition vs. Merger

o Acquired companies continue to exist as a legal entity – their books are just consolidated with the parent company in the parent’s financial statements

o Merged companies cease to exist and only the parent remains


Acquisition Costs

o Expensed in period incurred – i.e. NOT capitalized
o Netted against Stock Proceeds
-Stock registration and issuance costs


Deferred Tax Asset

Deduction will reduce future income taxes expense

o Note: Deferred Tax Assets and Liabilities are calculated using the FUTURE enacted tax rate, not the current one
Never discounted to Present Value


Deferred Tax Liability

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

o Note: Deferred Tax Assets and Liabilities are calculated using the FUTURE enacted tax rate, not the current one
Never discounted to Present Value


Permanent Differences

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 Ex: Tax-free Bond Interest


Deferred Income Tax Expense

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

o GAAP Method for calculating is the “Asset and Liability Approach”

Note: IFRS uses the “Liability Approach” only



-Recorded at Cost when acquired
-Revalued to FV each period on Balance Sheet
-Trading Securities:Unrealized Gains & Losses: Income Statement
-Available for Sale (AFS) Securities: Unrealized Gains and Losses: OCI


Fair Value hedge

-Initially recorded on Balance Sheet at Fair Value
-Gains/ Losses are reported on Income Statement


Cash Flow hedge

-Initially recorded on Balance Sheet at Fair Value


Foreign Currency Hedge



Hedging Required Disclosures

o Objectives and Strategies
o Context to help investor understand instrument
o Risk Management Policies
o Complete List of Hedged Instruments


Foreign Currency Transactions vs. Foreign Currency Translation

Foreign Currency Transactions-Used for transactions denominated in something other than a company' functional currency
>A change in exchange rates between the functional currency and the currency in which a transaction is denominated occurs
o This increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction
o Resulting in a Foreign Currency Transaction G/L
o The G/L goes to the Income Statement

Foreign Currency Translation-US corporation has a subsidiary in a foreign country. Functional/Reporting currency is the US dollar
>The translation issue then revolves around translating the foreign subsidiary’s financial statements into the reporting currency of the parent for purposes of preparing consolidated financial statements
o The G/L goes to OCI


Assets: Donated Property (Non-Reciprocal Transfer) - Donee

o Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose
o Exam Tip - Think of a charity holding a “fair” and then donating the property which is then recorded at “fair value”


Assets:Donated Property (Non-Reciprocal Transfer) – Donor

o Recorded at Fair Value of asset given up
o Gain or Loss recorded


Software Expenses

-Prior to Technological Feasibility - Expense as R&D
-After Feasibility but prior to Production - Capitalize
-Expenses incurred during production
o Inventory
-During training on internal use software – Expensed


Governmental Accounting Basics: Primary Objective

o Provide information that is useful and benefits a
wide range of users including
- Cost of Services provided
- Sufficiency of Revenues to cover costs
- Financial Position of the Entity


GAAP Hierarchy for State & Local Governments

o Authoritative
-Category A
-GASB Statements
-Category B
-GASB Technical Bulletins
-GASB Implementation Guides
-GASB-Approved AICPA Literature
o Non-Authoritative
-GASB Concepts Statements
-FASB Pronouncements / Other


Governmental Accounting: Fund Types

1.Governemental Funds
2.Fiduciary Funds
3. Proprietary Funds


Governmental Accounting: Fund Accounting (2 Types)

o Accrual Basis
-Current Economic Resources Focus
-Revenues recognized when earned
o Modified Accrual Basis
-Current Financial Resources Focus
-Revenues recognized when available &


Budget Estimates

o Appropriation
Highest amount allowed for an expenditure
o Encumbrance
Records purchases & reserves it


Governmental Accounting: Opening Budgetary Entry

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


Governmental Accounting: Closing Budgetary Entry

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


Governmental Funds (GSP-CD)

>Use Modified Basis of Accounting
>Have a Current Financial Resource Focus
>Revenue Recognized when available and measurable
o Sales tax revenue to be received within 60 days of the fiscal year end that will be used to fund expenditures made prior to year-end are treated as revenue in the current fiscal year
>General, Special Revenue, Permanent,- Capital, Debt)


General Fund

-Operating Fund of the governmental Unit
>Records Significant Revenues
Taxes, Tickets, Fines, Licenses
>Records Significant Expenditures
Police, Education, Fire Dept.


Special Revenue Fund

Restricted for a special purpose such as street repair


Capital Projects Fund

Used to acquire and build facilities


Debt Service Fund

Handles repayment of long-term debt and related interest


Governmental Fund Balance Types

>Restricted-Restricted by Contributor (Strict)
>Committed-Restricted by Government (Less strict because they can undo the restriction)
>Assigned-Intended to be used for a purpose
>NonSpendable- isn't in a "spendable" state (Inventory)


Governmental Fund Statements

>Balance Sheet
>Statement of Revenues, Expenditures, & Changes in Fund Balances


Derived Tax Revenue

>Collected by People "doing" things
-Buying Cars (Sales Tax)
-Going to work (Income Tax)


Imposed Tax Revenue

>Assessed just because things "exist"
-Property Tax on car
-Real Estate Tax
> Recorded as Revenue when Budgeted


Proprietary Fund

>Use Accrual Basis of Accounting
-Orientation is Income Determination
>Have an Economic Resource Focus
>Revenue Recognized when earned and measurable
>Internal Service & Enterprise Funds


Internal Service Fund

>Serves the needs of other governmental units
Ex: Motor Pool fixes government vehicles


Enterprise Fund

>Provides goods or services to external users
Ex: Post Office


Proprietary Fund Financial Statements

o Statement of Net Position
o Statement of Revenues, Expenses, and Changes in
Net Assets
o Statement of Cash Flows


Fiduciary Funds

>Used Accrual Basis of Accounting
>Have and Economic Resource Focus
>Agency,Pension Trust, Investment, & Private Purpose Trust


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


Fiduciary Fund Financial Statements

Statement of Net Position & Statement of Changes in Net Position


Government-Wide Financial Statements

>Statement of Net Position & Statement of Activities
--Prepared on an Accrual Basis
--Focus is on Economic Measurement
--Purpose is to provide Operational Accountability
>Component units are reported in the Entity-Wide Financial Statements and not the Fund Financial Statements.


Defined Benefit Pension Plans: Financial Statements Required

1.Statement of Fiduciary Net Position
-Deferred Outflows
-Deferred Inflows
-Fiduciary Net Position
2.Statement of Changes in Fiduciary Net Position
Net Investment Income
Benefit Payments
Admin Expense
-Net Change in Fiduciary Net Position
3.Financial Statement Notes
-Types of Benefits Provided
-Plan Member Classes
-Board of Directors Information
>Fair Value Determination


Interim Reporting-Discrete View

Interim period is a separate accounting period-NOT GAAP


Interim Reporting-Integral View

Interim period is part of the annual period-GAAP


Interim Reporting-Rules that differ from normal GAAP

>Gross Profit Method may be used to estimate COGS & Ending Inventory
>Temporary declines in Inventory aren't recognized


Interim Reporting-Discontinued Operations & Unusual/Infrequent Items

o Aren’t prorated
o Fully recognized in Interim Period as incurred
o If it occurs in Q3, it’s recognized in Q3


Interim Reporting-Cumulative Gains & Losses

Reported as if they occurred in the first quarter


Interim Reporting-Inventory Valuation

o 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


Problems with Interim Reporting

The matching principle gets messed up – Expenses incurred in one period may benefit future periods


Segment Reporting

>Required by publicly traded companies
> Test of Significance for a Segment (must meet one of
these requirements)
o Revenue of segment is 10% or more of total o Profit is 10% or more of total
o Segment assets are 10% or more of total
o 75% Test
---All segment revenues must equal 75% of total external revenues
>Disclosure Requirement
o If 10% or more of enterprise revenue comes from one customer, the segment making the sales must be disclosed


Inventory Discounts- Two Methods

1.Gross Method-Records discounts only when used
2.Net Methods-Records discounts whether used or not, unused discounts allocated to financing expense


Gross Margin Formula

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


Inventory Accounting Systems-Two Methods

>Periodic-Counted at certain times
-Weighted-Average Cost Flow Method
>Perpetual-Continually updated
-Moving-Average Cost Flow Method
>In periods of Rising Prices, Ending Inventory under Periodic and Perpetual Methods, are identical under FIFO


Inventory Turnover Ratio

COGS/Average Inventory


Average Day's Sales

365/Inventory Turnover



>Sends their inventory to be sold by someone else
>Include consignment items in inventory count
>Include shipping to consignee



>Sells someone else's inventory in their store and they get cut of the revenue
>Don't include consignment inventory held as part of their own inventory


Inventory Errors

>For Exam purposes, just remember
o Beginning Inventory Over/Under stated has no
effect on Ending Retained Earnings (E.RE)
o EI Over = COGS Under = E.RE Over
o EI Under = COGS Over = E.RE Under
> On the CPA Exam, you can pick up quick points if you have this relationship memorized


Weighted Average Cost per Unit Formula

(COGAS/Total Units)x Units Sold for COGS=WAC per Unit


Measurement of Inventory-Two Methods

1. Lower of Cost or Market
-LIFO & Retail Method
2.Lower of Cost or Net Realizable Value (NRV)
-FIFO & Average Cost
-All other Methods besides LIFO & Retail


Lower of Cost or Market Method

>Market Ceiling (NRV)
-NRV=Selling Price-Selling *Cost
>Inventory Replacement Cost
>Market Floor (NRV-Profit Margin)
**The middle amount is the market


Lower of Cost or NRV

NRV=Selling price-(Selling*Cost)

*Includes all Inventory Measurement methods other than LIFO & Retail Method
**Includes Disposal, Completion, Transportation Costs


Investments: Trading Securities

>Balance Sheet Treatment
-Recorded at Fair Value
-Classified as a Current Asset
>Unrealized Gains/Losses
-Go to Income Statement
>Relcassified to AFS or HTM?-No effect upon Transfer


Investments: Available-For-Sale Securities

>Balance Sheet Treatment
-Recorded at Fair Value
-Classified as Current or Non-Current Asset
>Unrealized Gains/Losses-OCI
-Held To Maturity:Unrealized G/L go to Stockholder's Equity
-Trading Securities:Unrealized G/L recognized in Current Period


Investments: Held-To-Maturity Securities

>Balance Sheet Treatment
-Recorded at Amortized Cost
-Classified as Current or Non-Current Asset
>Unrealized G/L: N/A
-Available-for-Sale:Unrealized G/L go to Stockholder's Equity
-Trading Securities:Unrealized G/L recognized Current Period


Capital Lease-Lessee

>Risk of ownership passes by (must meet one) TO-BOP 75/90
>Capitalize at Cost
o Asset & Liability Recorded
o Present Value of Future Lease Payments
o Discount Rate – Lesser of
-Implicit Rate in the Lease
-Market Rate
o Future minimum rental commitments
o By year – for 5 years
o All remaining years as a group


Capital Lease-Lessor

o Lessee must TO-BOP 75/90
o Collectability of lease payments is predictable
o No uncertainties about the lessor reimbursing the lessee for costs incurred


Operating Lease-Lessee

>Risk of ownership does not pass
>No asset or liability is recorded on financial statements
>Leasehold Improvements
o Capitalizes and depreciated over the lesser of
Lease Life or Leasehold Improvements Life


Operating Lease-Lessor

>Rent Revenue recorded
>Remains an asset and depreciated


Direct Financing Lease

>Interest Revenue decrease with passage of time
-Principal amount increases with each payment
-Carrying amount Lease decreases



>Any profit on the sale is deferred and amortized >Exception:
o If PV of Lease Payments is 10% or less of the asset’s FMV
-Gain is Recognized
o If PV of Lease Payments is greater than 10% of
FMV and the lease is operating
-Gain is recognized except the amount of the
PV of the lease payments
$100,000 Gain
PV of Lease Payments: $25,000
$75,000 of Gain: Recognized
$25,000 of Gain: Deferred


Quick Ratio

(Cash+AR+Trading Securities)/Current Liabilities


Current Ratio

Current Assets/Current Liabilities


Working Capital

Current Assets-Current Liabilities


A/R Turnover

Credit Sale/Average AR


Inventory Turnover

COGS/Average Inventory


Day Sales in Inventory

365/Inventory Turnover


Days to Collect A/R

Avg AR/Avg Sales Per Day


Gain Contingencies

Don't accrue due to conservatism


Loss Contingencies

Remote – Don’t Accrue or Disclose
Reasonably Possible – Disclose
Probable – Accrue (if Estimable) and Disclose


Non-Governmental Not-for-Profits

>Private colleges and hospitals that are not government- supported like a public university


Non-Governmental Not-for-Profits: Financial Statements Required

1.Statement of Financial Position(similar to BS)
2.Statement of Activities(similar to IS)
3.Statement of Cash Flows(both direct and indirect ok)
4.Statement of Functional Expenses (Volunteer Health org only)


Pension Expense:Projected Benefit Obligation (PBO)

Reflects future compensation levels


Pension Expense:Accumulated Benefit Obligation

PV of Pension Benefits accrued based on
present compensation levels


Pension Expense Formula

+Prior Service Cost Amortization
-Return on Plan Assets (Estimated)
o Beginning PBO x Interest Rate
o Increase of PBO due to time
+Unexpected Losses or (-) Gains
+Service Cost
o As employees work, the Projected Benefit
Obligation increases
=Pension Expense


Pension Expense:Fair Value of Plan Assets – PBO

o Overfunded (Asset) = Non-Current only
o Underfunded (Liability) = Current & Non- Current
o Gains/Losses go to OCI -- Net of Tax


Pension Expense:Financial Statement Disclosures

o Pension Funding Policies
o Types of Assets Held
o 5 Year Benefits to be paid
o 5 Year Benefits in aggregate thereafter
o Estimated Pension Contribution for next period


Pension Expense:Vested Benefits

Owed to employee regardless of continuance of employment via the Full Eligibility Date


The interest rate used to discount stock options is...

The interest rate used to discount stock options is the
risk-free interest rate.


Basic EPS Formula

(Net Income – Preferred Dividends) / Avg C/S Outstanding
> Note – If Cumulative, subtract the P/S dividend regardless of whether or not they’re declared.
>If dividends are in arrears from a prior year on P/S, don’t subtract that amount.
>The prior year P/S cumulative dividend reduces that year’s EPS. Only deduct the current year.
>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
> EPS is only required to be shown for Income from Continuing Operations and Net Income
o All others (Discontinued Operations) can be shown on the financial statements or in the notes


Diluted EPS Formula

>Stock options increase shares outstanding only if they are dilutive
o Their exercise price is less than market value
o If not, you ignore them in the calculation

>Net Income – P/S dividend + P/S dividend that wouldn’t be paid if converted (wash)
> Weighted average common stock + convertible equivalents
>Basic EPS must be calculated first and then compared with Diluted EPS.
>If Diluted EPS is not less than Basic EPS, then it is anti- dilutive and the security should not be included


Name the 5 steps of revenue recognition

1. Identify the contract with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations.
5. Recognize the revenue when the entity satisfies the performance obligations


Contract criteria

1. The parties have approved the contract, verbally, in writing or by implication consistent with the customary business practices.
2. Each party's rights to the goods or services can be identified
3. Payment terms can be identified
4. The contract has commercial substance
5.Collectibility of substantially all of the consideration is probable


Describe the criteria used to identify separate performance obligations.

A contract may include more than one performance obligation. For a performance obligation to be separate, the good or service must be distinct from other goods or services in the contract. A good or service is distinct if a customer can benefit from the good or service on its own.


What methods may be used to recognize revenue when the performance obligation is satisfied over time?

Input method
Output method


What are the two methods of determining transaction price when a contract includes variable consideration?

Expected value approach
Most likely amount approach


Provide an example of a constraint on estimating revenue based on variable consideration.

If earning the variable consideration is based on an uncertainty that is out of the company's control, such as weather or the volatility of the stock market, then variable consideration is constrained.

Also, if it is probable that a significant reversal of revenue would occur, then variable consideration is constrained.


Describe the journal entry to record sales revenue when noncash consideration is received.

The company will debit an asset account consistent with the noncash consideration received (e.g., a patent or investment) and credit sales revenue. The amount will reflect the fair value of the noncash consideration.


What type of account is Sales Discounts Forfeited and what is its natural balance?

Revenue account presented as “Other Income”

Natural credit balance


When a significant financing component is present in a sales contract, what revenue in addition to sales revenue does the company record?

Interest Revenue


Expected Value Method

Uses the sum of probability-weighted outcomes to determine the transaction price. Use the expected value method when an entity has many contracts with similar characteristics.


Describe how a single total transaction price is allocated to multiple separate performance obligations.

The total transaction price is allocated based on the proportion of the total standalone selling price represented by each performance obligation. The proportion is found by dividing the standalone price for the performance obligation by the total of the standalone prices for the performance obligations. The proportion for each performance obligation is then multiplied by the total transaction price to determine the amount of the total transaction price that will be allocated to each performance obligation.


List the two criteria required for a performance obligation to be considered distinct.

1.The customer must be able to benefit from the good or service on its own or with resources readily available.
2.The good or service must be able to be separately identified from other promises in the contract.


How is the transaction price allocated for a contract with performance obligations that are not distinct from each other?

If a contract contains promises that are not distinct from each other, then the goods or service promised in the contract represent a single performance obligation. The total contract price is allocated to the single performance obligation.


If the standalone selling prices for performance obligations are not directly observable, what steps should a company take?

When the standalone selling prices are not directly observable, then a company should estimate the standalone selling prices.


The total standalone selling price for three separate performance obligations in a contract is $100,000. The first performance obligation has a standalone selling price of $45,000. What proportion of the total contract transaction price should be allocated to the first performance obligation?

Performance obligation 1 = 45,000/100,000 = .45 or 45%


The measurement focus of governmental-type funds is the determination of:

The measurement focus of governmental type funds is on both:

the changes in financial position and
financial position.
The flow of financial resources refers to the changes in financial position from the sources and uses of financial resources (GASB 1300.102). By contrast, the measurement focus of a proprietary fund is on determining “operating income, changes in net position (or cost recovery), financial position, and cash flows”—similar to a commercial entity.


A firm is applying international accounting standards to its defined-benefit pension plan and has pension gains and losses. As a result,

Pension gains and losses are recognized immediately and in full in accumulated other comprehensive income. However, they are not subsequently amortized to earnings.


The funded ratio of a pension plan compares:

The plan's fiduciary net position as a percentage of the actuarially determined total pension liability.

According to GASB Statment No. 68 (para 46(b)(1)(d), governmental employers must report as required supplemental information, the pension plan's fiduciary net position as a percentage of the actuarially determined total pension liability.


Premiums received on general obligation bonds are generally transferred to what fund?

Debt Service Fund


In a Tax Agency Fund, revenues must be recognized:

Revenues are not reported in Agency Funds.

Agency Funds act as intermediaries in the process of disbursing monies from one governmental entity to another. The government has no claim on the resources in the Agency Fund and does not recognize revenues when it receives the monies or recognize expenses when the monies are disbursed.


Which account should Excel City credit when it issues a purchase order for supplies?

Budgetary Fund Balance.

The entry to record a purchase order is a debit Encumbrances and a credit to Budgetary Fund Balance.


Shared revenues received by an Enterprise Fund of a local government for operating purposes should be recorded as:

Non-Operating Revenues
An Enterprise Fund is a type of Proprietary Fund.

Shared Revenues received by a Proprietary Fund for operating purposes should be recorded as Non-Operating Revenues in the period in which they are earned and become measurable.