FAR Chapter# 1

Question 1

FAR 1-1 - CONCEPTUAL FRAMEWORKS | Name the single source of authoritative nongovernmental U.S. GAAP

Answer 1

The FASB “Accounting Standards Codification” (ASC).

Question 2

FAR 1-2 - CONCEPTUAL FRAMEWORKS | The term “International Financial Reporting Standards” includes what standards?

Answer 2

International Accounting Standards (IAS)

International Financial Reporting Standards (IFRS)

IFRIC Interpretations

SIC Interpretations

Question 3

FAR 1-3 - CONCEPTUAL FRAMEWORKS | Who are the primary users of general purpose financial reports?

Answer 3

Existing and potential:

• Investors
• Lendors
• Other creditors

Question 4

FAR 1-4 - CONCEPTUAL FRAMEWORKS | Name the pervasive constraint on the information provided in financial reporting.

Answer 4

Cost Constraint:

The benefits of reporting financial information must be greater than the costs of obtaining and presenting information.

Question 5

FAR 1-5 - CONCEPTUAL FRAMEWORKS | Name the FUNDAMENTAL qualitative characteristics of useful financial information.

Answer 5

Relevance and Faithful Representation

Question 6

FAR 1-6 - CONCEPTUAL FRAMEWORKS | Name the three elements of Relevance.

Answer 6

Predictive Value

Confirming Value

Materiality

Question 7

FAR 1-7 - CONCEPTUAL FRAMEWORKS | Name the three elements of Faithful Representation.

Answer 7

Neutrality

Completeness

Freedom from error

Question 8

FAR 1-8 - CONCEPTUAL FRAMEWORKS | Name the ENHANCING qualitative characteristics of financial information.

Answer 8

Comparability, Verifiability, Timeliness, and Understandability

Question 9

FAR 1-9 - CONCEPTUAL FRAMEWORKS | According to SFAC #5, what should a full set of financial statements include?

Answer 9

Statement of Finacial Position (balance sheet)

Statement of Earnings (income statement)

Statement of Comprehensive Income

Statement of Cash Flows

Statement of Changes in Owners’ Equity

Question 10

FAR 1-10 - CONCEPTUAL FRAMEWORKS | What is the difference between realization and recognition?

Answer 10

Realization: When sold and converted to cash (or claims to cash)

Recognition: When recorded in the financial statements

Question 11

FAR 1-11 - CONCEPTUAL FRAMEWORKS | List the 10 elements of financial statements according to SFAC #6. CREG and LALEID

Answer 11

C - comprehensive income
R - revenue
E - expenses
G - gains
and 
L - losses
A - assets
L - liabilities
E - equity (of net assets)
I - investments by owners
D - distributions to owners

Question 12

FAR 1-12 - CONCEPTUAL FRAMEWORKS | List the six elements of financial statements according to the IASB Framework.

Answer 12

Assets
Liabilities
Equity

Income (revenue and gains)
Capital maintenance adjustments
Expenses (expenses and losses)

Question 13

FAR 1-13 - CONCEPTUAL FRAMEWORKS | Name the five elements of present value measurement per SFAC #7. EVTUO

Answer 13

Estimate of future cash flow

expectations about timing Variations of future cash flows

Time value of money (the risk-free rate of interest)

the price for bearing Uncertainty

Other factors (e.g., liquidity issues and market imperfections)

Question 14

FAR 1-14 - CONCEPTUAL FRAMEWORKS | Describe the expected cash flow approach for present value computations.

Answer 14

Considers a range of possible cash flows and assigns a (subjective) probablility to each cash flow in the range to determine the weighted-average, or “expected”, future cash flow.

Question 15

FAR 1-15 - REPORTING NET INCOME | What is the presentation order of the major components of an income and retained earnings statement? IDEA

Answer 15

Income Statement:
Income (or loss) from continuing operations
Income (or loss) from Discontinued operations
Extraordinary items

Retained Earnings Statement:
Cumulative effect of a change in Accounting principle

Question 16

FAR 1-16 - DISCONTINUED OPERATIONS | The gain (loss) from discontinued operations can consist of what?

Answer 16

An impairment loss, a gain (loss) from actual operations, and a gain (loss) on disposal.

Question 17

FAR 1-17 - DISCONTINUED OPERATIONS | In what period are the following reported: An impairment loss? A gain (loss) from actual operations? A gain (loss) on disposal?

Answer 17

All are reported in the period in whch they occur.

Question 18

FAR 1-18 - DISCONTINUED OPERATIONS | In reporting discontinued operations, how is a “component” of an entity defined under U.S. GAAP and IFRS?

Answer 18

U.S. GAAP:

1. An operating segment
2. A reportable segment
3. A reporting unit
4. A subsidiary
5. An asset group

IFRS:

1. A separate major line of business or geographical area of operations
2. A subsidiary acquired exclusively with a view to resale

Question 19

FAR 1-19 - DISCONTINUED OPERATIONS | How do we account for subsequent increases in the fair value of a discontinued component?

Answer 19

A gain is recognized for the subsequent increase in fair value minus costs to sell (but not in excess of the previously recognized cumulative loss). The gain is reported in the period of increase.

Question 20

FAR 1-20 - EXIT OR DISPOSAL ACTIVITIES | What type of costs are associated with exit and disposal activities?

Answer 20

Involuntary employee-termination benefits

Costs to terminate a contract that is not a capital lease

Other costs associated with exit or disposal activities

Question 21

FAR 1-21 - EXTRAORDINARY ITEMS | Define extraordinary items.

Answer 21

Material in nature

Of character significantly different from the typical or customary business activities (unusual)

Not expected to recur in foreseeable future (infrequent)

Not normally considered in evaluating the ordinary operating results of an enterprise

Key words: Unusual and Infrequent

Remember: Extraordinary items are recognized under U.S. GAAP but not IFRS.

Question 22

FAR 1-22 - EXTRAORDINARY ITEMS | List some examples of extraordinary items.

Answer 22

The abandonment of, or damage to, a plant due to an infrequent earthquake or an infrequent flood.

An expropriation of a plant by the government.

A prohibition of a product line by a newly enacted law or regulation.

Question 23

FAR 1-23 - ACCOUNTING CHANGES | Name the three types of accounting changes.

Answer 23

Change in an accounting principle

Change in accounting estimate

Change in reporting entity

Question 24

FAR 1-24 - ACCOUNTING CHANGES | How is a change in accounting principle reported?

Answer 24

Cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented.

Prior-period financial statements are restated, if presented.

Question 25

FAR 1-25 - ACCOUNTING CHANGES | What are the special changes in an accounting principle? How are special changes in accounting principle reported?

Answer 25

A change to LIFO from another method of inventory pricing under U.S. GAAP Any other change in which a cumulative effect adjustment is considered impractical to calculate Special changes are reported prospectively (like a change in estimate).

Question 26

FAR 1-26 - ACCOUNTING CHANGES | How is a change in an accounting estimate reported?

Answer 26

Prospectively The effect is shown in the current and/or future periods that are affected by the change Financial statements are not restated

Question 27

FAR 1-27 - ACCOUNTING CHANGES | Under U.S. GAAP, how is a change in reporting entity reported?

Answer 27

All current and prior period financial statements presented are restated.

Question 28

FAR 1-28 - ACCOUNTING CHANGES | How are error corrections reported?

Answer 28

Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated.

Question 29

FAR 1-29 - COMPREHENSIVE INCOME | Define comprehensive income.

Answer 29

Change in equity (net assets) that results from revenue, expenses, gains and losses during a period, as well as any other recognized changes in equity that occur for reasons other than investments by distributions to owners.

Question 30

FAR 1-30 - COMPREHENSIVE INCOME | Identify five items included in other comprehensive income. PUFER

Answer 30

Pension adjustments Unrealized gains and losses on AFS securities Foreign currency translation adjustments and gains/losses on foreign currency transactions that are designated as economic hedges of a net investment in a foreign entity Effective portions of cash flow hedges Revaluation surpluses (IFRS only)

Question 31

FAR 1-31 - COMPREHENSIVE INCOME | List the two formats acceptable for reporting comprehensive income.

Answer 31

Statement of Comprehensive Income (single-statement approach) Statement of Income followed by separate Statement of Comprehensive Income (two-statement approach)

Question 32

FAR 1-32 - COMPREHENSIVE INCOME | List some disclosure requirements for comprehensive income.

Answer 32

Tax effects of each component included in current "Other Comprehensive Income" Changes in the accumulated balances of components of "Other Comprehensive Income" Total accumulated other comprehensive income - AOCI Reclassification adjustments between other comprehensive income and net income

Question 33

FAR 1-33 - BALANCE SHEET AND DISCLOSURES OVERVIEW | Identify the contents of the first note to the financial statements.

Answer 33

Summary of Significant Accounting Policies Identify and describe: - Measurement bases used in preparing the financial statements - Principles and methods - Criteria - Policies - Pricing

Question 34

FAR 1-34 - BALANCE SHEET AND DISCLOSURES OVERVIEW | Describe the related party disclosures required under U.S. GAAP and IFRS.

Answer 34

Material related party transactions Related party notes/accounts receivable Control relationships Note: IFRS requires disclosure of key management compensation. U.S. GAAP does not require this disclosure.

Question 35

FAR 1-35 - BALANCE SHEET AND DISCLOSURES OVERVIEW | What are the U.S. GAAP disclosure requirements for risks and uncertainties?

Answer 35

Nature of operations. Use of estimates in preparing the financial statements. Significant estimates. Current vulnerability due to certain concentrations.

Question 36

FAR 1-36 - INTERIM FINANCIAL REPORTING | What are the guidelines for interim reporting?

Answer 36

Use same accounting principles that were used in the most recent annual report. Allocate expenses to the interim period benefited Revenues are recognized in the period in which they are earned and realized or realizable. A total for comprehensive income in condensed financial statements of interim periods.

Question 37

FAR 1-37 - INTERIM FINANCIAL REPORTING | What income tax rate is used in interim financial reporting?

Answer 37

Use the best estimate of effective tax rate to be applicabel for full fiscal year on quarterly statements.

Question 38

FAR 1-38 - SEGMENT REPORTING | Name the four required disclosures for segments of an enterprise.

Answer 38

Operating segments Products and services Geographic areas Major customers

Question 39

FAR 1-39 - SEGMENT REPORTING | Define operating segment.

Answer 39

Distinct revenue-producing components of the enterprise about which separate financial information is produced internally, and whose operating results are regularly reviewed by the enterprise. Determined using a "management approach. "

Question 40

FAR 1-40 - SEGMENT REPORTING | Name two quantitative thresholds used in indentifying operating segments.

Answer 40

10% "Size" test 75% "Reporting Sufficiency" test

Question 41

FAR 1-41 - SEGMENT REPORTING | Describe the 10% test for identifying reportable segments.

Answer 41

Revenue Reported revenue, including both sales to external customers and intersegment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segments. Reported profit or loss The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of - The combined reported profit of all operating segments that did not report a loss, or - The combined reported loss of all operating segments that did not report a gain. Assets Assets are 10% or more of the combined assets of all operating segments. Note: must meet only one of the above.

Question 42

FAR 1-42 - SEGMENT REPORTING | What is the 75% test for identifying reportable segments?

Answer 42

Combined external (consolidated) revenue of all reportable segments must be at least 75% of the total consolidated revenue of the entity. The practicle limit is 10 segments, but noa precise limit.

Question 43

FAR 1-43 - SEGMENT REPORTING | What are the disclosure requirements for reportable operating segments?

Answer 43

For each reportable segment, the entity must report: - Identifying factors - Products or services - Profit or loss details - Asset details - Liability details (IFRS only) - Measurement criteria - Reconciliations

Question 44

FAR 1-44 - DEVELOPMENT-STAGE ENTERPRISES | Define development-stage enterprise.

Answer 44

Enterprise that devotes substantially all of its efforts to establishing a new business and either planned principal operations or have not commenced or no significant revenue has ben generated therefrom.

Question 45

FAR 1-45 - DEVELOPMENT-STAGE ENTERPRISES | Indicate any special accounting treatment for development-stage enterprises.

Answer 45

Same generally accepted accounting principles as established operating enterprises, with additional disclosures: - Identify statements as those of development stage enterprise. - Accumulated losses identified as "deficit accumulated during development stage". - In the income statement, show revenue and expenses, and cumulative tot of both amounts from company's inception. - In the SCF, include cumulative amounts of cash inflows and outflows from enterprise's inception and current amounts of cash inflows and outflows for each period presented. - Issue a separate statement of stockholders equity, indicating shares issued, date of issuance, dollar amounts assigned, and noncash consideration, if any.

Question 46

FAR 1-46 - FIRST-TIME ADOPTION OF IFRS | What is the date of an entity's transition to IFRS?

Answer 46

The date of the opening balance sheet.

Question 47

FAR 1-47 - SEC REPORTING REQUIREMENTS | Describe the Form 10-K and the Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?

Answer 47

Form 10-K: Filed annually by U.S. registered companies. Includeds a summary of financial data, MD&A, and audited financial statements prepared using U.S. GAAP. Form 10-Q: Filed quarterly by U.S. registered companies. Includes reviewed financial statements, interim MD&A, and certain disclosures.