FAR Cards Flashcards
(260 cards)
1
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Q
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2
Q
Which costs are inventoriable?
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Purchases - net of discounts Freight - FOB Shipping point costs go to buyer; FOB Destination costs charged to seller Warehouse expenditures
2
Q
How are changes in accounting principle applied?
A
Retrospective Application: -Prior Periods adjusted -Retained Earnings adjusted -Completed Contract to % Completion Ex: LIFO to FIFO
2
Q
What is a serial bond?
A
Any bond that matures in installments
2
Q
When is the fair value method used for recording interest in a separate company?
A
20% Ownership or Less Accounted for as a purchase If amount paid is less than fair value; results in a gain in current period
2
Q
What is a current asset?
A
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
2
Q
What is a temporary difference related to deferred taxes?
A
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
2
Q
How are derivatives recorded?
A
At cost when acquired re-valued to fair value each period on Balance Sheet.
2
Q
What is the primary objective of accounting?
A
To measure income
2
Q
Which personal financial statements are required?
A
Statement of Financial Condition Statement of Changes in Net Worth
2
Q
What expenditures are included in the cost of equipment?
A
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.
2
Q
What is the primary objective of governmental accounting?
A
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
2
Q
Which organization’s standards are the most authoritative in the hierarchy of international accounting?
A
The International Accounting Standards Board (IASB)
2
Q
How are changes in accounting principle applied?
A
Retrospective Application: -Prior Periods adjusted -Retained Earnings adjusted -Completed Contract to % Completion Ex: LIFO to FIFO
3
Q
When does ownership of goods transfer when shipped FOB Shipping Point?
A
FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock
3
Q
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
A change of principle. Applied retrospectively.
3
Q
What is a term bond?
A
Any bond that matures on a single date
3
Q
When is the equity method used when purchasing another company’s stock? How is it recorded?
A
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
3
Q
What is a current liability?
A
A liability expected to be paid within 12 months or less
3
Q
What is a deferred tax asset?
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Deduction will reduce future income taxes expense.
3
Q
How are unrealized gains/losses on trading securities recorded?
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Recorded on income statement
3
Q
What is the most authoritative set of accounting pronouncements?
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The FASB Codification All pronouncements fall under the Codification umbrella
3
Q
How are assets and liabilities valued in a personal financial statement?
A
Estimated current value
3
Q
How are Research and Development costs recorded?
A
They are expensed in the period incurred and are not capitalized.
3
What are the three major types of funds in governmental accounting?
Governmental Proprietary Fiduciary
3
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
3
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.
4
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
4
Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate? How would this change be applied?
A change in accounting principle. Applied retrospectively.
4
What is a debenture bond?
A bond not secured by any collateral
4
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
4
How is the Quick Ratio calculated?
(Cash + A/R + Trading Securities) / Current Liabilities
4
What is a deferred tax liability?
Income will be taxable in a future period and will increase future tax expense
4
How are gains and losses on Available for Sale (AFS) securities recorded?
They are included in Other Comprehensive Income.
4
What are the 2 Levels of Authority within the FASB codification?
Authoritative and Non-Authoritative
4
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
4
Which expenditures are included in the cost of a building?
All expenditures to get the building into working condition are ready for use
4
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)
4
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
4
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.
5
Which costs are non-inventoriable?
Sales Commissions Interest on liabilities to vendors Shipping expense to customers
5
How is a change in accounting estimate applied?
A change in accounting estimate is applied prospectively (going forward). No backwards adjustment is made.
5
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
5
When is consolidation not required?
Ownership less than 50% OR Majority owner does not control - i.e. bankruptcy or foreign bureaucracy
5
How is the Current Ratio calculated?
Currents Assets / Current Liabilities
5
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.
5
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
5
How does managerial accounting differ from financial accounting?
Managerial Accounting has a “timeliness” focus Managerial Accounting is not required to follow GAAP
5
What is the general presentation on a statement of financial condition?
Assets - Liabilities - Estimated taxes on assets sold = Net Worth
5
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
5
What is a budget appropriation?
The highest amount allowed for a particular expenditure under a budget.
5
What is the objective of the IFRS framework?
To provide users with information on international accounting.
5
How is a change in accounting estimate applied?
A change in accounting estimate is applied prospectively (going forward). No backwards adjustment is made.
6
When are discounts recorded under the gross method?
Under the gross method; discounts are recorded only when used.
6
Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate? How would this change be applied?
Change in depreciation method would be a change in accounting estimate. It is applied prospectively.
6
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
6
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
6
How is Working Capital calculated?
Currents Assets - Current Liabilities
6
What valuation allowance is used with respect to a deferred tax asset?
If it is “probable” that not all of a Deferred Tax Asset (debit) will be realized then the Deferred Tax Asset account must be written down (credit) to reflect this
6
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.
6
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited Form 10Q - Quarterly and Reviewed
6
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
6
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.
6
What is an encumbrance?
Records purchase and reserves it for the encumbrance.
6
Which assumptions are followed within the IRFS framework?
Entity is a Going Concern Entity uses the accrual basis of accounting.
6
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.
7
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.
7
How is a correction of an accounting error made?
Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements. The correction of the error must be included in the footnotes.
7
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)
7
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
7
How is A/R Turnover calculated?
Credit Sales / Average A/R
7
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
7
Where are gains and losses on foreign currency hedges recorded?
In Other Comprehensive Income (OCI)
7
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
7
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
7
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.
7
What is the opening budgetary entry?
Dr Estimated Revenues Control Cr Appropriations Control Dr/Cr Budgetary Fund Balance (plug)
7
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
7
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.
8
How is gross margin calculated?
Gross Margin = Sales – COGS (BI + P – EI)
8
What are the requirements for a prior period adjustment?
Effect is Material Is identifiable in Prior Period Couldn't be estimated in Prior Periods
8
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
8
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
8
How is Inventory Turnover calculated?
COGS / Average Inventory
8
What is deferred income tax expense?
The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities GAAP Method for calculating is the “Asset and Liability Approach” Note: IFRS uses the Liability approach only
8
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
8
What are the Primary Constraints of Financial Reporting?
Cost vs. Benefit Materiality
8
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.
8
How is donated property recorded by the donee?
Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose Exam Tip - Think of a charity holding a “fair” and then donating the property which is then recorded at “fair value”
8
What is the closing budgetary entry?
Dr Appropriations Control Dr/Cr Budgetary Fund Balance (plug) Cr Estimated Revenues Control
8
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
8
What are the requirements for a prior period adjustment?
Effect is Material Is identifiable in Prior Period Couldn't be estimated in Prior Periods
9
Describe the periodic inventory system.
Inventory is counted at certain times throughout the period Weighted-average cost flow method is used.
9
How is a change from a non-GAAP accounting method to a GAAP method recorded?
It is treated as a correction of an accounting error. Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements Correction of the error must be included in the footnotes
9
How are bonds reported when classified as trading securities?
Reported at FMV with unreleased gains and losses being included in earnings
9
How is Day Sales in Inventory calculated?
365 / Inventory Turnover
9
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
9
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
9
What are the Secondary Constraints of Financial Reporting?
Consistency - Year vs. Year Comparability - Company vs. Company
9
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
9
How is donation of property recorded by the donor?
Recorded at Fair Value of asset given up. Gain or Loss is recorded.
9
What are the types of governmental funds?
General Fund Special Revenue Fund Permanent Fund Capital Projects Fund Debt Service Fund
9
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.
9
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
10
Describe the perpetual inventory system.
Inventory count continually updated Uses a moving-average cost flow method
10
How does an inventory error effect the financial statements?
Effect on Ending Inventory = Effect on Net Income If one is overstated- both overstated. If one is understated- both understated. Misstating inventory corrects itself after TWO periods.
10
How are bonds amortized under the interest method?
Both discount and premium amortization amounts increase each year
10
How is Days to Collect A/R calculated?
Average A/R / Average Sales per Day
10
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.
10
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
10
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
10
How is double-declining balance (DDB) depreciation calculated?
1 / (Useful Life x 2 x Book Value) Ignore salvage value.
10
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
10
What is the Pervasive Constraint within IFRS?
Cost vs. Benefit
10
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.
11
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.
11
How is a change in entity recorded?
Applied retrospectively. All prior periods presented for comparative purposes must reflect the change Footnote disclosures must be made Changing to Consolidated Statements
11
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
11
How are gain contingencies recorded?
They are NOT accrued due to Conservatism
11
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.
11
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
11
How are cumulative gains and losses reported in interim financials?
Reported as if they occurred in the first quarter
11
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
11
What is a Special Revenue Fund?
Restricted for a specific purpose such as street repair.
11
Which items are considered reporting elements under IFRS?
Asset Liability Equity Income Expense
11
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
12
How is inventory turnover calculated?
COGS / Average Inventory
12
What is the stated rate for a bond?
Rate on the face of the bond
12
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
12
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
12
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
12
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
12
How is straight line depreciation calculated?
(Cost - Salvage Value) / Useful life = depreciation expense
12
What is a Permanent Fund?
Legally restricted fund; where only earnings can be used to fund programs. Principal remains intact.
12
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.
13
How is Average Day's Sales in inventory calculated?
365 / Inventory Turnover
13
What is the market rate on a bond?
Rate that bonds are currently selling for
13
Where are re-measurement gains and losses due to foreign currency translation reported?
On the income statement as Other Income.
13
What is an accrual?
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
13
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
13
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
13
What is a Capital Projects Fund?
Used to acquire and build facilities.
13
When transitioning to IFRS what type of financial statement must be produced for the first reporting period?
A full comparative statement using IFRS.
14
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.
14
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
14
What is a deferral?
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
14
For whom is segment reporting required?
Publicly traded companies
14
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.
14
What is a Debt Service Fund?
Handles repayment of long-term debt and related interest.
14
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
15
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.
15
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
15
What is recognition in accounting?
When an item is recorded and included in the financial statements
15
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
15
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.
15
Which fund statements are issued in Governmental Accounting?
Balance Sheet Statement of Revenues; Expenditures; and Changes in Fund Balance
15
For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?
The Fair Value election
16
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.
16
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.
16
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
16
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
16
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.
16
When is Revenue recorded in Governmental Accounting?
When it is BOTH available and measurable; regardless of when it is spent.
16
Where on the financial statements are adjustments for adopting to IFRS made?
In the entity's retained earnings or equity
17
How does misstatement of ending inventory effect Ending Retained Earnings?
EI Over = COGS Under = ERE Over EI Under = COGS Over = ERE Under
17
When does interest expense start accruing on a bond?
When the bonds are issued
17
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
17
What is Derived Tax Revenue?
Money collected from people doing things: Sales tax (buying cars) or income tax (people working)
17
How is going concern different under IFRS than from GAAP?
Going Concern is an assumption under IFRS
18
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
18
How is an interest payment on a bond calculated?
Cash for payment = Stated rate x Face amount
18
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market prices For example NYSE or NASDAQ
18
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.
18
How are extraordinary items treated under IFRS?
IFRS doesn't allow extraordinary items.
19
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
19
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
19
What items are included in a Level 2 valuation input?
Interest rates Prime rate
19
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)
19
How is the completed contract method used under IFRS?
Completed contract method is not allowed under IFRS.
20
How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?
COGAS / Total Units = Weighted Average Cost Per Unit
20
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
20
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs such as assumptions or forecasts Lowest priority for valuation
20
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
20
How is LIFO treated under IFRS?
IFRS does not allow LIFO.
21
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.
21
How is the retirement of bonds recorded?
Gain or Loss is Ordinary Extraordinary if both unusual and infrequent
21
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
21
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
21
Which financial statements are required under IFRS?
Statement of Comprehensive Income Statement of Changes in Equity
22
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
22
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
22
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
22
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
22
How is the term income used in IFRS?
Income is used instead of revenue and encompasses BOTH revenue and gains.
23
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
23
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
23
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
23
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
23
How is the term profit used in IFRS?
In IFRS the term profit is used instead of Net Income.
24
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
24
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
24
What is an accrued liability?
Expense that has been incurred but not paid Example: rents payable
24
How is infrastructure reported on a governmental Statement of Net Assets?
Modified approach: Reported at cost; no accumulated depreciation
24
How does IFRS treat gains?
They are treated the same as revenue and are not separated on the financial statements.
25
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
25
How is a Statement of Net Assets divided?
Into Governmental Activities and Business Activities
25
How does IFRS treat losses?
In IFRS losses are treated the same as expenses but they ARE separated on the financial statements.
26
When are revenues recognized?
When they have been earned; i.e. company has performed
26
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.
26
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.
27
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
27
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.
28
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
28
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
29
What is an operating cycle?
Average time it takes to turn materials or services into Cash
29
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.
30
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
30
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
31
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
31
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)
32
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
32
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
33
What is a market cost?
The sale price of an asset (Exit Cost)
33
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
34
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
34
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
35
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
35
How is investment property reported under IFRS?
Initially recorded at cost Revalued using either Fair Value model or Cost model
36
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash Only used when cash collection is uncertain
36
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
37
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
37
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
38
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
38
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
39
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
39
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)
40
How are franchise revenues recorded?
Franchiser - Startup franchise fee revenue deferred until franchisee has completed substantial performance Franchisee – Costs are deferred until corresponding revenue is recognized
40
How is internally generated goodwill reported under IFRS?
It is not recognized.
41
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
41
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.
42
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
42
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
43
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
43
How are defined benefit plans recorded under IFRS?
Project-unit-credit method calculates the PV of the defined benefit obligation
44
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
44
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
45
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation Uses the Consumer Price Index (CPI)
45
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.
46
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
47
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
48
When should impaired assets be written down to fair value and expensed?
Immediately.
49
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
50
What are business start-up costs?
One-time costs for opening a new business Expensed as they are incurred
51
When is interest \*not\* expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
52
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
53
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments Unrealized gains on AFS Securities Minimum Pension Liability adjustment for defined benefit plans
54
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
55
Where is comprehensive income reported?
Reported in Stockholder’s Equity on Balance Sheet or in a Statement of Income and Comprehensive Income Note: Earnings Per Share is not required for OCI
56
What disclosures on accounting policies are required in financial statements?
Accounting Principles used Basis of Consolidation Inventory Pricing Methods Depreciation Method Amortization of Intangibles
57
What are some major risks and uncertainties that must be disclosed?
Nature of Operations Use of Estimates and listing of Significant Estimates Concentration vulnerability
