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CPA Flashcards > FAR Chapter 1 > Flashcards

FAR Chapter 1 Flashcards

1
Q
  1. To provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
  2. Information about a reporting entity’s economic resources and claims against the entity (Financial Position-B/S)
  3. Changes in economic resources and claims
  4. Financial performance reflected by accrual accounting (provides a better basis for assessing the entity’s past and future performance than does cash basis - Income Statement)
  5. Financial performance reflected by past cash flow (Cash Flows)
  6. Changes in economic resources and claims, NOT resulting from financial performance (ex: issuing additional stock)
A

What are the 6 objectives of financial reporting?

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2
Q

F/S must be BOTH Relevant and a Faithful representation

A

What 2 characteristics make financial statements useful?

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3
Q 
[Roger is PC and Materialistic] [R PC & M]
Relevance
- Predictive Value
- Confirmatory value
---Materiality
A

What are the ingredients of the relevance component of F/S usefulness?

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4
Q 
[Roger is never on the FENC e] [FENC]
Faithful Representation
- free from Error
- Neutrality (no bias)
- Completeness
A

What are the ingredients of the faithful representation component of F/S usefulness?

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5
Q 
[roger Exercises to be CUT like a V] [E CUT-V]
Enhancing Qualitative Characteristics
- Comparability (Consistency)
- Understandability
- Timeliness
- Verifiability
A

What are the Enhancing Qualitative Characteristics for the Relevance and Faithful representations

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6
Q
  • statement of financial position (balance sheet)
  • statement of earnings and comprehensive income (income statement)
  • statement of cash flows
  • statement of changes in owners equity (statement of investments by and distributions to owners)
A

A full set of financial statements includes:

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7
Q
  • assets
  • liabilities
  • equity
  • investments by owners
  • distributions to owners
  • comprehensive income
  • revenue
  • expenses
  • gains
  • losses
A

10 key elements that make up financial statements

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8
Q

assets
liabilities
equity or net assets

A

3 basic elements of financial statements

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9
Q

an economic resource that has a probable future benefit, one can obtain the benefit, and the transaction creating the benefit has already occurred

A

definition of an asset

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10
Q

an economic obligation in which one needs to use or transfer an asset, it can’t be avoided and the transaction has already occurred

A

definition of a liability

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11
Q
  • contributions / investments by owners
  • distributions to owners (dividends)
  • comprehensive income (all changes in equity other than “owner” sources)
A

equity consists if what 3 elements

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12
Q

[DENT]

  • Derivative cash flow hedges
  • Excess adjustment of Pension PBO and RV of plan assets at year end
  • Net unrealized gains or losses on “available for sale” securities
  • Translation adjustments for foreign currency
A

what changes affect comprehensive income?

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13
Q
  • consistency
  • conservatism
  • cost/benefit
  • matching
  • allocation
  • full disclosure
  • recognition (booking an item)
  • realization (selling an item)
A

what are the accounting rules and concepts (principals)

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14
Q
  • it meets the definition of an element (asset, liability)
  • element is capable of being measured in monetary terms
  • the item is relevant and faithful representation (useful)
A

when do you recognize a financial statement element?

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15
Q
  • historical cost
  • replacement cost
  • fair market value (FMV) - per ASC 820 (FASB 157) “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date”
  • Net realizable value (NRV)
  • Present value (PV)
A

ways to measure a financial statement element in monetary terms

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16
Q
  1. Identify the asset or liability to be measured
  2. Determine the principal (highest volume) or most advantageous market (maximizes price or minimizes amt paid)
  3. Determine the valuation premise (in-use or in-exchange)
  4. Determine the appropriate valuation technique (market, income, cost)
  5. Obtain inputs for valuation (level 1, level 2, level 3)
  6. Calculate the fair value of the asset
A

6 steps in applying the fair market value (FMV) approach

17
Q

[MIC]

  • Market approach
  • Income approcach
  • Cost approach
A

fair market value (FMV) valuation techniques

18
Q
  • Level 1 - uses quoted prices from active markets
  • Level 2 - Directly or indirectly observable inputs, other than level 1 (yield curves, bank prime rates, interest rates, credit risks, default rates on loans) (2 similar buildings in a downtown market)
  • Level 3 - Unobservable inputs are used if level 1 or 2 are not available (using financial forecasts or expected cash flow estimates) (ex. sub-prime mortgages)
A

inputs for FMV valuation, what do the 3 levels represent?

19
Q

SFAC #7

  • Risk
  • Timing
  • Interest
  • Amount of cash flows:
  • – Traditional approach - use most likely cash flow amounts
  • – Expected approach - use weighted avg of different possibilities
A

Factors that must be considered when calculating present values

20
Q
  • earned

- realizable (realized)

A

under accrual accounting, revenues or gains are recognized when they are…

21
Q
  • A binding arrangement exists (signed contract)
  • Services rendered or delivery has occurred
  • Fixed or determinable price exists
  • Collection is reasonably assured
A

Revenue is recognized when… (4 things)

22
Q
  • Cause and effect - expenses that produce revenue at identifiable points in time can be matched directly to revenues
  • Systematic and rational allocation - expenses that produce revenue over long periods of time are matched to those periods using a reasonable means of allocation (depreciation)
  • Immediate recognition - some expenses cannot be directly related to specific benefits and are expensed as incurred (salaries of SG&A)
A

Expenses or losses are recognized as incurred based on what methodologies (3)

23
Q
  1. Nature of operations: major products, services and markets served
  2. Use and extent of estimates in preparation of financial statements
  3. Certain significant estimates, and their potential impact on the amount and value of assets, liabilities, gains and losses
  4. Current vulnerability associated with concentrations with respect to:
    - – Particular customers, suppliers, lenders, grantors or contributors
    - – Revenue from particular products, services or fund raising events
    - – Available sources of supply of materials, labor, or services; or of licences or other rights used in the entity’s operations
    - – Market or geographical area in which the entity conducts its operations
A

What are the 4 areas of disclosure with regard to risks and uncertainties?

24
Q

they are used to ensure that all disclosures that are required under GAAP are made

  1. Summary of significant accounting policies
  2. Summary of significant assumptions - for prospective FS
  3. Other notes to the financial statements
A

What are the 3 types of notes to the financial statements and what are they used for

25
Q

US GAAP is rules based, IFRS is principles based

A

what is the main difference between US GAAP and IFRS?

26
Q
  1. Relevance
  2. Reliability
  3. Understandability
  4. Comparability / Consistency
A

IASB Framework - 4 principal qualitative characteristics

27
Q 
[Roger is PC and Materialistic]
Relevance
- Predictive value
- Confirmatory value
- Materiality
A

IASB Framework - items under the Relevance principal

28
Q

Reliability

  • Neutrality
  • Faithful representation
  • Substance over form
  • Prudence (conservatism)
  • Completeness
A

IASB Framework - items under the Reliability principal

29
Q
  • timeliness

- benefit > cost

A

IASB Framework - 2 constraints for relevant and reliable information

30
Q
  • assets
  • liabilities
  • equity
  • income
  • expense
A

IFRS - 5 key elements of financial statements

31
Q

Statement of Financial Position

A

IFRS - what is a balance sheet referred to as?

32
Q

No, but a US GAAP balance sheet does

A

IFRS - does the statement of financial position have to be ordered by liquidity?

33
Q

Income

A

IFRS - what is the term used for economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants

34
Q

It meets the definition of an element and can be measured reliably

A

IFRS - what are the 2 criteria that must be met for incorporating items on the income statement or statement of financial position

CPA Flashcards (7 decks)

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