FAR - Framework

Question 1

What are the 7 components of the general purpose external financial report?

Answer 1

1. Income statement
2. Balance sheet
3. Statement of cash flows
4. Statement of retained earnings
5. Statement of comprehensive income
6. Footnote disclosure
7. Auditors opinion.

Question 2

What does GAAP address?

Answer 2

Recognition, measurement, and disclosure.

Question 3

What are the five financial statements?

Answer 3

1. Income statement
2. Statement of comprehensive income
3. Balance sheet
4. Statement of changes of shareholders equity
5. Statement of cash flows

Question 4

What is neutrality?

Answer 4

Free of bias

Question 5

What are the ingredients of relevance?

Answer 5

Predictive value, confirmatory value, and materiality.

Question 6

What is completeness?

Answer 6

Includes all data necessary to be faithfully representative.

Question 7

What are the ingredients of faithful representation?

Answer 7

Completeness, free from material error, neutrality.

Question 8

What is verifiability?

Answer 8

Different knowledgable and independent observers can reach similar conclusions

Question 9

What is predictive value?

Answer 9

To be relevant, accounting information should assist financial statement users in making predictions about future events

Question 10

What are objectives of financial reporting?

Answer 10

To provide information about the entity to current and future users of the financial statements who are making credit and investment decisions

Question 11

List the enhancing qualitative characteristics of financial information.

Answer 11

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 12

What are the primary qualitative characteristics of financial information?

Answer 12

Faithful Representation and Relevance.

Question 13

The four assumptions are

Answer 13

1. Entity
2. Going concern
3. Unit of measurement
4. Time period assumption.

Question 14

The four principles are

Answer 14

Revenue recognition
Expense recognition
Measurement
Full disclosure.

Question 15

When should a company recognize revenue?

Answer 15

When they are earned and collectibility is reasonably assured

Question 16

What is conservatism

Answer 16

The reporting of less optimistic amounts under conditions of uncertainty

Question 17

What does a fresh start measurement do?

Answer 17

Establishes a new carrying value after an initial recognition and is unrelated to previous amounts

Question 18

Define cost effectiveness

Answer 18

This constraint on GAAP limits recognition and disclosure if the cost of providing the information exceeds its benefit

Question 19

What is the purpose of the SEC?

Answer 19

Enforces GAAP

Question 20

Describe the formula for quick or acid test ratio

Answer 20

(Cash + long term investment + A/R) / current liabilities

Question 21

How are assets recorded on the balance sheet

Answer 21

Declining order of liquidity

Question 22

Define net realizable value

Answer 22

The amount the firm expects to receive from the sale or collection of an item

Question 23

What is a valuation account used for

Answer 23

Used to increase or decrease the book value of an item to a measure of current value

Question 24

Define gains

Answer 24

Increases in equity or net assets from peripheral or incidental transactions

Question 25

What is the main purpose of disclosing comprehensive income?

Answer 25

To report the net change in equity in a single amount

Question 26

What is the equation to get comprehensive income?

Answer 26

CI = Net income + other comprehensive income

Question 27

What is the indirect method on the statement of cash flows

Answer 27

Reconciles net income to cash flows from operating activity

Question 28

What is the direct method on the statement of cash flows

Answer 28

Actual inflows and outflows from cash operations. Must also disclose the indirect method as a supporting schedule.

Question 29

What is the cash flow category for interest paid and received?

Answer 29

Operating activities.

Question 30

What items are in the operating activities category on the statement of cash flows?

Answer 30

1. From customers 2. Interest income or dividend income 3. Sale of trading investments 4. Suppliers and employees 5. Government

Question 31

What items are in the investing activities category on the statement of cash flows?

Answer 31

1. Sale/ purchase of PPE 2. Sale/ purchase of debt or equity securities of other entities 3. Collection of loan principles

Question 32

What items are in the financing activities category on the statement of cash flows?

Answer 32

1. Sale of entity's own equity securities 2. From issuance of debt 3. Dividends 4. Redeem long term debt 5. Reacquire capital stock

Question 33

Ratio | Working capital =

Answer 33

Current assets - current liabilities

Question 34

Ratio | Current ratio =

Answer 34

Current assets / current liabilities

Question 35

Ratio | AR turnover =

Answer 35

Net credit sales / average AR

Question 36

Ratio | Inventory turnover =

Answer 36

COGS / avg inventory

Question 37

Ratio | Acid ratio AKA quick ratio =

Answer 37

(Cash + net AR + marketable securities) / current liabilities

Question 38

Ratio | Times interest earned =

Answer 38

(Net income + interest expense + income tax) / interest expense

Question 39

Ratio | Average days to collect AR =

Answer 39

365 / AR turnover

Question 40

Ratio | AR turnover =

Answer 40

Credit sales / average AR

Question 41

Ratio | Profit margin =

Answer 41

Net income / sales

Question 42

Ratio | Return on assets =

Answer 42

Net income / average total assets

Question 43

Ratio | Return on Equity =

Answer 43

Net income / average common shareholders equity

Question 44

Ratio | EPS =

Answer 44

(Net income - preferred dividends) / weighted avg common shares outstanding