FAR Tier 1 Deck 2

Question 1

What are the assumptions of the treasury stock method in calculating diluted earnings per share (DEPS)?

Answer 1

The options and warrants are exercised at the later of the
Beginning of the period or
Time of issue.
Common shares are issued.
The proceeds of exercise are used to purchase common stock at the average market price for the period.

Question 2

When are put options or contracts to repurchase a company’s own stock dilutive in calculating diluted earnings per share (DEPS)?

Answer 2

They are dilutive when their exercise prices exceed the average market prices.

Question 3

What are the steps for recognizing revenue from contracts with customers?

Answer 3

1. Identify the contract(s) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) a performance obligation is satisfied.

Question 4

What are the criteria for a contract to be accounted for by revenue recognition?

Answer 4

1. The contract was approved by both parties.
2. The contract has commercial substance.
3. Each party’s rights can be identified.
4. It is probable that the entity will collect substantially all of the consideration to which it is entitled according to the contract.

Question 5

Cost to incurred to fulfill a contract must be capitalized of if the following is met

Answer 5

1) The costs relate directly to a current or anticipated contract that is specifically identifiable
2) the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future
3) the costs are expected to be recovered

Question 6

The transaction price should not be adjusted for the effect of time value of moneyif

Answer 6

1. the time between the payment and the delivery of promised good or service is 1 year or less
2. Transfer of good or service is at the discretion of the customer.
3. a substantial amout of consideration promised is variable, and its amout or timing
   varies on the basis of future circumstances that are not within the control of entity
   or the customer

Question 7

Transaction price should be adjusted for the effect of time value of money when

Answer 7

the contract includes a significant financing component.

The interest income or expense is recognized using the effective interest method.

Interest income or expense is presented in the income statement seperately from revenue from contracts with customers

Question 8

The Expected Value Method for Revenue Recognition

Answer 8

Sum of probability-weighted amounts in the range of possible consideration amounts

Question 9

The Most Likely Amount Method for Revenue Recognition

Answer 9

Single most likely amount in a range of possible consideration amounts

Question 10

How does the input method recognize revenue over time?

Answer 10

The input method recognizes revenue on the basis of (1) the entity’s inputs to the satisfaction of the performance obligation relative to (2) the total expected inputs to the satisfaction of that performance obligation.

Question 11

How does the output method recognize revenue over time?

Answer 11

The output method recognizes revenue based on direct measurement of (1) the value of goods or services transferred to the customer to date relative to (2) the remaining goods or services promised under the contract.

Question 12

When an estimated loss on a project becomes apparent, how is it accounted for?

Answer 12

As soon as an estimated loss on any project becomes apparent, it must be recognized in full.

Question 13

What periodic financial statements does Regulation S-X apply to?

Answer 13

Regulation S-X applies to the reporting of interim and annual financial statements, including notes and schedules.

Question 14

Give examples of information discussed in management’s discussion and analysis (MD&A).

Answer 14

The information includes the entity’s outlook and significant effects of known trends, events, and uncertainties. It addresses such matters as

Liquidity
Capital resources
Results of operations
Effects of changing prices

Question 15

What is the SEC’s Form 10-Q?

Answer 15

Form 10-Q is the quarterly report. It must be reviewed (not audited) by an independent accountant.

Question 16

What is the SEC’s Form 8-K?

Answer 16

Form 8-K is a current report to disclose material events. It must be filed within 4 business days after the material event (e.g., change in control, bankruptcy, or resignation of a director).

Question 17

How is the interim period tax expense (benefit) calculated?

Answer 17

Year-to-date ordinary income (loss) before income taxes
×
Estimated annual effective tax rate
=
Year-to-date tax expense (benefit)
–
Tax expense (benefit) recognized in previous interim periods
=
Current interim period tax expense (benefit)

Question 18

What are the three types of accounting changes?

Answer 18

Change in accounting principle
Change in accounting estimate
Change in reporting entity

Question 19

When does a change in accounting principle occur?

Answer 19

A change in accounting principle occurs when an entity

Adopts a generally accepted principle different from the one previously used,
Changes the method of applying a generally accepted principle, or
Changes to a generally accepted principle when the principle previously used is no longer generally accepted.

Question 20

How is a change in accounting principle accounted for?

Answer 20

It is retrospectively applied unless it is impracticable to determine the cumulative effects of the change.

Question 21

How is a change in accounting estimate accounted for?

Answer 21

It is prospectively applied. The prospective application must be made in the period of change and any future periods affected.

Question 22

How is a change in accounting estimate inseparable from a change in accounting principle accounted for?

Answer 22

It is accounted for as a change in estimate, i.e., a prospective application is required.

Question 23

How is a change in reporting entity accounted for?

Answer 23

It is retrospectively applied to interim and annual financial statements.

Question 24

Is a change to a generally accepted accounting principle from one that is not generally accepted an accounting change?

Answer 24

It is an error correction, not an accounting change.

Question 25

Give examples of accounting errors in the financial statements.

Answer 25

A mathematical mistake A mistake in the application of GAAP An oversight or misuse of facts existing when the statements were prepared

Question 26

How is an error correction accounted for?

Answer 26

An accounting error is corrected by Restating prior-period financial statements Retrospectively applying the new principle (if the error results from a change to a generally accepted accounting principle from one that is not generally accepted)

Question 27

Form 10Q must be filed within

Answer 27

40 days if the filer is a large accelerated(public float of 700 million or more) or an accelerated (public float between 75 and 700 million) 45 days if the filer is non-accelerated

Question 28

Estimated Annual Effective Tax Rate is based on

Answer 28

- Anticipated investment tax credits - Foreign Tax rates - percentage depletion -capital gains rates -Other tax planning alternatives

Question 29

Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered

Answer 29

A Change in Estimate

Question 30

Prior year's refund recieved in the current year should be recorded in which year?

Answer 30

Prior year, but if it is recorded in year 2, the adjustment should be made using retained earnings.

Question 31

A change in warranty obligations because new information has been obtained is considered a(n)

Answer 31

Change in estimate

Question 32

Change in accounting principle when the cumulative effect on any prior period is not known. is treated as a(n)

Answer 32

Change in estimate