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CPA > FAR - F1 > Flashcards

FAR - F1 Flashcards

1
Q

What body has the legal authority to establish GAAP principles?

A

The SEC

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2
Q

The FASB Codification includes literature from what all standard setting bodies?

A

FEDPRIA

FASB
Emerging Issues Task Force (EITF)
Derivative Implementation Group Issues
Accounting Principles Board Opinions
Accounting Research Bulletins
Accounting Interpretations
AICPA
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3
Q

What SEC standards are included in the Codification (ASC)?

A

Regulation For Accounting IS Emerging

Regulation S-X
Financial Reporting Releases (FRR)
Accounting Series Releases (ASR)
Interpretive Releases (IR)
Staff Accounting Bulletins (SAB)
Emerging Issues Task Force (EITF) Topic D and SEC Staff Observer Comments
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4
Q

What is the goal of the Private Company Council (PCC)

A

To establish alternatives to U.S. GAAP, where appropriate, to make private company financial statements more relevant, less complex, and cost-beneficial

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5
Q

What is the purpose of the IASB?

A

To develop a single set of high-quality global accounting standards

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6
Q

What is the standard-setting process for GAAP?

A
  1. FASB creates an exposure draft to receive public comment.
  2. A majority vote of the Board is required to approve an exposure draft for issuance.
  3. FASB considers all comments received.
  4. A majority vote of the Board is required to amend the ASC.
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7
Q

What is the standard-setting process for IFRS?

A
  1. The IASB publishes a discussion paper on a major new topic.
  2. IASB reviews comments and publishes an exposure draft.
  3. 9 members of the IASB must approve draft
  4. IASB considers all comments received
  5. An IFRS must be approved by atleast 9 members
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8
Q

What does the “Conceptual Framework” for financial reporting do?

A

It explains the reasoning behind accounting methods

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9
Q

What is the difference between IFRS and GAAP in regards to the Conceptual Framework?

A

IFRS entities are asked to consider the applicability of the concepts when developing accounting policies in the absence of a standard.

GAAP does not allow the framework to be applied to specific accounting issues.

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10
Q

What is FASB’s version of the conceptual framework called?

A

Statements of Financial Accounting Concepts (SFAC)

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11
Q

What is the objective of financial reporting?

A

To provide financial information about the reporting entity that is useful to primary users in making decisions.

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12
Q

What are the primary users of general purpose financial reports?

A

Existing and potential investors, lenders, and other creditors

(Regulators are not considered primary users)

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13
Q

What financial information should be provided in general purpose financial reports to meet primary users’ informational needs?

A

Information about the resources of the entity, claims against the entity, and how efficiently/effectively management have used the resources.

(Assets, liabilities, turnover profit)

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14
Q

How do primary users use the financial information in statements?

A

To asses the entity’s prospects for future net cash inflows to the entity, which can be used to estimate the value of the company.

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15
Q

What are the fundamental qualitative characteristics of useful financial information?

A

Relevance and Faithful Representation

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16
Q

What elements must financial information have to be relevant?

A

“Passing Confirms Money”

  1. Predictive Value
  2. Confirming Value
  3. Materiality
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17
Q

What elements does financial information need in order to have faithful representation?

A

“Completely Neutral is Free From Error”

  1. Completeness (have financial statements and notes)
  2. Neutrality (free from bias)
  3. Freedom from Error (doesn’t require perfect accuracy)
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18
Q

Perfect faithful representation is generally achievable?

True/False?

A

False

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19
Q

What elements enhance qualitative characteristics?

A

“Compare and Verify in Time to Understand”

  1. Comparability & Consistency
  2. Verifiability
  3. Timeliness
  4. Understandability
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20
Q

What statements are included in a full set of financial statements?

A
  1. Balance Sheet
  2. Income Statement
  3. Comprehensive Income
  4. Cash Flows
  5. Stockholder’s Equity
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21
Q

What are the 10 fundamental assumptions of U.S. GAAP?

A
  1. Entity Assumption
  2. Going Concern Assumption
  3. Monetary Unit Assumption
  4. Periodicity Assumption
  5. Historical Cost Principle
  6. Revenue Recognition Principle (when earned and realizable)
  7. Matching Principle (expenses matched to revenue)
  8. Accrual Accounting
  9. Full Disclosure Principle
  10. Conservatism Principle
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22
Q

What is the fundamental assumption of IASB?

A

Going Concern

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23
Q

What are the 10 GAAP elements of financial statements?

A

“REGL ALE needs ID”

  1. Comprehensive Income
  2. Revenues
  3. Expenses
  4. Gains
  5. Losses
  6. Assets
  7. Liabilities
  8. Equity
  9. Investments by Owners
  10. Distributions to Owners
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24
Q

What is the difference between GAAP and IASB elements of financial statements?

A

GAAP: has investments by owners and distributions to owners

IFRS: has capital maintenance adjustments instead of owner investments/distributions. (capital maintenance is adjustments to equity from revaluation/restatement of assets and liabilities)

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25
Q

Five FASB elements of present value measurement

A
  1. Estimate of future cash flow
  2. Expectations about timing variations of future CF
  3. Time value of money (risk-free rate of interest)
  4. Price for bearing uncertainty (credit risk)
  5. Other factors (liquidity issues/market imperfections)
26
Q

The income statement is useful in determining what?

A

Profitability, Value for investment purposes, and Credit worthiness

27
Q

What is the order of the components in the income and retained earnings statements?

A

(I.D.E.A.)

  1. Income from continuing operations (operating, non-operating, income taxes)
  2. Income from Discontinued operations (net of tax)
  3. Extraordinary items (net of tax)
  4. Cumulative effect of change in Accounting principle (net of tax on retained earnings)
28
Q

What are the three calculations from discontinued operations on the income statement?

A
  1. Impairment loss
  2. Gain/loss from actual operations (during years trying to sale)
  3. Gain/loss on disposal
29
Q

What are the criteria that a component must meet to be considered “held for sale”?

A
  1. Management commits to a plan to sell component
  2. Component is available for immediate sale in present condition
  3. Sale of component is probable and expected to be completed within one year
  4. Sale of component being actively marketed
30
Q

What is the difference between IFRS and GAAP on how components are valued when classifying them as held for sale?

A

IFRS requires each individual asset/liability to be measured

GAAP doesn’t require individual remeasurement, just remeasurement of the component as a whole

31
Q

What conditions must be present to be considered a discontinued operation?

A

“GEL”

Disposal of major Geographic area
Disposal of major Equity method investment
Disposal of major Line of business

Represents a strategic shift/have major effect on operations

32
Q

How is a component valued upon being classified held for sale?

A

At the lower of its carrying amount or fair value less costs to sale

33
Q

What criteria must be met to recognize a liability for exit/disposal activities?

A
  1. An obligating event has occurred
  2. Event results in a present obligation to transfer assets/provide services in future (ex. lease termination costs)
  3. Entity has no discretion to avoid the future transfer of assets

(Operating losses recognized in periods incurred)

34
Q

What makes an item extraordinary?

A

Unusual and infrequent

if only one met then reported as non-operating in continued operations section of I/S

35
Q

IFRS allows for reporting of extraordinary items?

True/False?

A

False, IFRS does not allow for extraordinary items

36
Q

What are the three types of accounting changes encountered on the I/S and how are they approached?

A
  1. Changes in accounting estimate (Prospective)
  2. Changes in accounting principle (Retrospective)
  3. Changes in accounting entity (Restate)
37
Q

What are examples of changes of an accounting estimate?

A
  1. Change in lives of fixed assets
  2. Adjustments of accrual of salaries
  3. Write-downs of obsolete inventory
  4. Material nonrecurring IRS adjustments
  5. Settlement of litigation
  6. Changes in accounting principle that are inseparable from change in estimate (ex. change in principle due to being able to perform an estimation now)
38
Q

How do you account for changes in accounting principle in the income statement?

A

Adjust the beginning retained earnings in the earliest period presented

39
Q

How does IFRS approach disclosing a change in accounting principle using comparative information?

A

Present at least 3 balance sheets (end of current period, end of prior period, beginning of prior period) and two of each other financial statement (current period and prior period).

With the cumulative adjustment being shown in beginning retained earnings on the BS for beginning of prior period.

40
Q

What is the exception to the general rule of retrospective when a change in accounting principle?

A

If it is “impractical” to calculate the cumulative effect adjustment then account for the change prospectively.

Ex. change to LIFO or change in depreciation method

41
Q

When should financial statements be restated?

A

GAAP: If change in accounting entity and comparative financial statements or if an error correction (errors include miscalculation, misapplication of GAAP/IFRS, change from non-GAAP/IFRS method to GAAP/IFRS method)

IFRS: If there is an error correction and it is not impractical to determine the specific cumulative effect, if impractical then account for it prospectively from earliest practical date. (IFRS does not address changes in accounting entity)

42
Q

What components make up comprehensive income?

A

“PUFE likes to Revalue his income”

Pension adjustments
Unrealized gains/losses (only available-for-sale securities)
Foreign currency items
Effective portion of cash flow hedges
Revaluation surplus (IFRS only)
43
Q

What is the revaluation surplus?

A

Under IFRS, it is gains recognized when intangible assets and fixed assets are revalued

44
Q

Under both GAAP and IFRS how must comprehensive income be reported in the statements?

A

Either

  1. A single statement of comprehensive income, beginning with revenues
  2. Following an income statement and begins with net income
45
Q

When disclosing significant accounting policies in the notes, what items must be identified and described?

A
  1. Measurement bases used in preparing statements
  2. Accounting principles and methods
  3. Criteria
  4. Policies
  5. Pricing
  6. IFRS requires a statement of compliance to IFRS in the notes, while GAAP does not
  7. IFRS requires disclosure of significant judgements and estimates made by management in applying accounting policies, GAAP only requires disclosure of “significant estimates”
46
Q

What are common accounting policies disclosed in the Significant Accounting Policy footnote?

A
  1. Basis of consolidation
  2. Depreciation methods
  3. Amortization of intangibles
  4. Inventory pricing
  5. Accounting for recognition of profit on long-term construction contracts
  6. Recognition of revenue from franchise/lease operations
47
Q

What factors constitute a related part?

A
  1. Affiliates of an entity
  2. Entities accounted for using equity method
  3. Parent/subsidiary entities or subsidiaries of same parent
  4. Trusts for benefit of employees
  5. Management of an entity and immediate family
  6. Owners of more than 10% of voting interest and immediate family (Not included in IFRS)
48
Q

What disclosures must be made in relation to material related party transactions under GAAP?

A
  1. Nature of relationship
  2. Description of transactions
  3. Amount of transaction
  4. Amounts due to or from the parties at each balance sheet date
  5. Name of related party, if necessary
49
Q

What disclosures must be made in relation to material related party transactions under IFRS?

A
  1. Nature of relationship
  2. Description of transactions
  3. Amount of transaction
  4. Amounts due to or from the parties at each balance sheet date
  5. Allowance for bad debts related to related parties
  6. Bad debt expense/write-offs of debts from related parties
50
Q

What disclosures must be made under GAAP for related parties?

A
  1. Material related party transactions
  2. Related party notes/accounts receivable
  3. Control relationships between entities (even if no transactions)
  4. Not included in statements, but SEC requires a separate disclosure of key management compensation
51
Q

What disclosures must be made under IFRS for related parties?

A
  1. Material related party transactions
  2. Compensation arrangements for key management
  3. Related party notes/accounts receivable
  4. Control relationships
52
Q

Interim financial reporting is required by what regulatory body?

A

The SEC, not by GAAP or IFRS

53
Q

Why are interim statements unaudited?

A

Because timeliness is emphasized over reliability

54
Q

In interim reporting what is the difference in how tax rates are applied between GAAP and IFRS?

A

GAAP requires the use of enacted tax rates only

IFRS allows the effective tax rate to be estimated

55
Q

What are the two materiality threshold tests for deciding what segments to report?

A
  1. 10% Size test (must only meet one)
    a. Revenue (revenue including intracompany
    transactions is 10%+ of all revenue)
    b. Reported Profit/Loss (if reported profit/loss is 10%+ of
    the GREATER of profit of all segments that didn’t report
    loss OR loss of all segments that didn’t report a loss)
    c. Assets (segment’s assets 10%+ of all assets)
  2. 75% reporting sufficiency test
    (After above tests make sure 75%+ of all external
    revenue reported by segments is being shown.
    Practical limit of segments is 10)
    All other segments not separated out by above criteria are combined and disclosed in “all other segments”
56
Q

How to calculate segment profit or loss?

A

Revenues (internal and external)
Less: Directly traceable costs
Less: Reasonably allocated costs by CFO

57
Q

GAAP does not require segments to disclose liabilities, but IFRS does.

True/False?

A

True

58
Q

What are 8 basic SEC required reporting forms?

A
  1. Securities Offering Registration Statements
  2. Form 10-K (filed annually by U.S. registered companies)
  3. Form 10-Q (filed quarterly by U.S. registered companies; unaudited)
  4. Form 11-K (annual report of employee benefit plans)
  5. Forms 20-F & 40-F (similar to 10-K, filed by foreign private issuers; Canada uses 20-F other uses 40-F; can use GAAP or IFRS or Other)
  6. Form 6-K (similar to 10-Q, but semi-annually by foreign private issuers; unaudited)
  7. Form 8-K (report major corporate events)
  8. Forms 3, 4, and 5 (filed by directors, officers, or owners of more than 10% of equity)
59
Q

How many years must be presented in financial statements?

A

Balance Sheet - 2 years (CY & PY)
IS/Equity/Cash Flows - 3 years (CY & 2PY)

IFRS requires 2 years for BS, IS, Equity, Cash Flows

60
Q

What is XBRL?

A

(Extensible Business Reporting Language)
Software used by SEC that uses data tags to describe financial information for reporting. Tells computers how to interpret the context of the text.

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