FAR1

Question 1

FAR

How are changes in accounting principle applied?

Answer 1

Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO

Question 2

FAR

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

Answer 2

A change of principle.

Applied retrospectively.

Question 3

FAR

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

Answer 3

A change in accounting principle.

Applied retrospectively.

Question 4

FAR

How is a change in accounting estimate applied?

Answer 4

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

Question 5

FAR

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

Answer 5

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

Question 6

FAR

How is a correction of an accounting error made?

Answer 6

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

The correction of the error must be included in the footnotes.

Question 7

FAR

What are the requirements for a prior period adjustment?

Answer 7

Effect is Material

Is identifiable in Prior Period

Couldn’t be estimated in Prior Periods

Question 8

FAR

How is a change from a non-GAAP accounting method to a GAAP method recorded?

Answer 8

It is treated as a correction of an accounting error.

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements

Correction of the error must be included in the footnotes

Question 9

FAR

How does an inventory error effect the financial statements?

Answer 9

Effect on Ending Inventory : Effect on Net Income

If one is overstated- both overstated. If one is understated- both understated.

Misstating inventory corrects itself after TWO periods.

Question 10

FAR

How is a change in entity recorded?

Answer 10

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

Question 11

FAR

What is a serial bond?

Answer 11

Any bond that matures in installments

Question 12

FAR

What is a term bond?

Answer 12

Any bond that matures on a single date

Question 13

FAR

What is a debenture bond?

Answer 13

A bond not secured by any collateral

Question 14

FAR

What is a sinking fund bond?

Answer 14

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed

Question 15

FAR

What is the formula to calculate proceeds of a bond sale?

Answer 15

Present Value of the principal payment at maturity+ Present Value of Interest Payments made
: Market Value of Bond Proceeds

Question 16

FAR

How is the present value of a bond calculated?

Answer 16

Step 1: PV of $1 @ Yield Rate (not Stated Rate)
x Bond Face Value

PLUS

Step 2: PV of an Ordinary Annuity of $1 for Term @Yield
x (Stated Rate x Face)

Question 17

FAR

Which costs are included in bond issuance costs? How are they recorded?

Answer 17

Include Engraving; Printing; Legal; Underwriter; Registration

Debited to a deferred charge account and amortized over life of Bond using S/L

Bond Proceeds - Bond Issuance Costs : Net Bond Proceeds

Time of amortization begins when issued

Question 18

FAR

How are bonds reported when classified as trading securities?

Answer 18

Reported at FMV with unreleased gains and losses being included in earnings

Question 19

FAR

How are bonds amortized under the interest method?

Answer 19

Both discount and premium amortization amounts increase each year

Question 20

FAR

Describe the book value method when converting from bonds to stocks.

Answer 20

No gain or loss recognized

APIC is the plug for the difference between the Bond’s Book Value and the Par Value of the Common Stock

Question 21

FAR

What is the stated rate for a bond?

Answer 21

Rate on the face of the bond

Question 22

FAR

What is the market rate on a bond?

Answer 22

Rate that bonds are currently selling for

Question 23

FAR

What happens when the bond’s market rate is greater than the stated rate?

Answer 23

Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value

Question 24

FAR

What happens when a bond’s market rate is less than the stated rate?

Answer 24

Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value

Question 25

# FAR How does accrued interest on a bond affect the purchase price?

Answer 25

The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point). Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.

Question 26

# FAR When does interest expense start accruing on a bond?

Answer 26

When the bonds are issued

Question 27

# FAR How is an interest payment on a bond calculated?

Answer 27

Cash for payment : Stated rate x Face amount

Question 28

# FAR What amount of interest is expensed on a bond interest payment?

Answer 28

Interest expense : effective yield x carrying value Any difference between expense and cash payment is applied as amortization against premium/discount

Question 29

# FAR What are convertible bonds? Which recording method is used?

Answer 29

Bonds that can be converted to stock Book value method used if no gain or loss Market value method used if there is a gain or loss

Question 30

# FAR How is the retirement of bonds recorded?

Answer 30

Gain or Loss is Ordinary Extraordinary if both unusual and infrequent

Question 31

# FAR When is a gain recognized in a debt restructuring?

Answer 31

If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized

Question 32

# FAR What is the gain recognized under a settlement of debt?

Answer 32

Gain recognized: Difference between cash paid and carrying amount of debt Difference between non-cash asset given and re-valued at FMV and debt carrying amount

Question 33

# FAR For a creditor; how is a loan impairment recorded?

Answer 33

If future cash flows discounted at loan's Effective Interest Rate are less than Carrying Value: Effective Rate calculated using original rate; not modified rate

Question 34

# FAR When is the fair value method used for recording interest in a separate company?

Answer 34

20% Ownership or Less Accounted for as a purchase If amount paid is less than fair value; results in a gain in current period

Question 35

# FAR When is the equity method used when purchasing another company's stock? How is it recorded?

Answer 35

Ownership 21% to 50% Gives significant influence Purchase Price - Par Value : Goodwill Dividends received from the investee reduce the investment account and are not income

Question 36

# FAR When are companies required to file consolidated financials? How is it recorded?

Answer 36

Ownership of other company is greater than 50% Investment account is eliminated Only parent company prepares consolidated statements; not subsidiary. Acquired assets/liabilities are recorded at Fair Value on acquisition date. Eliminating entries for inter-company sales of inventory & PPE; also inter-company investments

Question 37

# FAR When is consolidation not required?

Answer 37

Ownership less than 50% OR Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

Question 38

# FAR What occurs under a step acquisition?

Answer 38

Acquirer held previous shares accounted for under Fair Value Method or Equity Method; and are now re-valued to Fair Value Results in a Gain or Loss in current period

Question 39

# FAR What is the difference between an acquisition and a merger?

Answer 39

Acquired companies continue to exist as a legal entity - their books are just consolidated with the parent company in the parent's financial statements Merged companies cease to exist and only the parent remains

Question 40

# FAR How are acquisition costs recorded in a merger?

Answer 40

Expensed in period incurred - i.e. NOT capitalized: Accounting; Legal; Valuation; Consulting; Professional Netted against stock proceeds: Stock registration and issuance costs

Question 41

# FAR What is a current asset?

Answer 41

Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle Includes: Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids, and short-term investments

Question 42

# FAR What is a current liability?

Answer 42

A liability expected to be paid within 12 months or less

Question 43

# FAR How is the Quick Ratio calculated?

Answer 43

(Cash + A/R + Trading Securities) / Current Liabilities

Question 44

# FAR How is the Current Ratio calculated?

Answer 44

Currents Assets / Current Liabilities

Question 45

# FAR How is Working Capital calculated?

Answer 45

Currents Assets - Current Liabilities

Question 46

# FAR How is A/R Turnover calculated?

Answer 46

Credit Sales / Average A/R

Question 47

# FAR How is Inventory Turnover calculated?

Answer 47

COGS / Average Inventory

Question 48

# FAR How is Day Sales in Inventory calculated?

Answer 48

365 / Inventory Turnover

Question 49

# FAR How is Days to Collect A/R calculated?

Answer 49

Average A/R / Average Sales per Day

Question 50

# FAR How are gain contingencies recorded?

Answer 50

They are NOT accrued due to Conservatism

Question 51

# FAR When are loss contingencies recorded?

Answer 51

If Probable - they are accrued (if estimable) and disclosed If Reasonably Possible - they are disclosed If Remote - don't accrue or disclose

Question 52

# FAR What is a temporary difference related to deferred taxes?

Answer 52

GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another Example: Dividends from a subsidiary accounted for using the Equity Method - tax income but not book income

Question 53

# FAR What is a deferred tax asset?

Answer 53

Deduction will reduce future income taxes expense.

Question 54

# FAR What is a deferred tax liability?

Answer 54

Income will be taxable in a future period and will increase future tax expense

Question 55

# FAR Which period's tax rate is used to calculate a deferred tax asset or liability?

Answer 55

The FUTURE enacted tax rate not the current one. It is never discounted to present value.

Question 56

# FAR What valuation allowance is used with respect to a deferred tax asset?

Answer 56

If it isprobable that not all of a Deferred Tax Asset (debit) will be realized then the Deferred Tax Asset account must be written down (credit) to reflect this

Question 57

# FAR What effect do permanent differences have on deferred income taxes?

Answer 57

They have no tax impact. When calculating the total differences between book and tax income subtract the permanent differences from the total before applying a future enacted tax rate

Question 58

# FAR What is deferred income tax expense?

Answer 58

The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities GAAP Method for calculating is theAsset and Liability Approach Note: IFRS uses the Liability approach only

Question 59

# FAR How are deferred tax assets classified as current or non-current on the balance sheet?

Answer 59

Current Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. All current amounts are netted and reported as a single amount on the Balance Sheet Non-Current Deferred Tax Assets and Liabilities will impact income tax expense 12 months or more fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet

Question 60

# FAR How are derivatives recorded?

Answer 60

At cost when acquired re-valued to fair value each period on Balance Sheet.

Question 61

# FAR How are unrealized gains/losses on trading securities recorded?

Answer 61

Recorded on income statement

Question 62

# FAR How are gains and losses on Available for Sale (AFS) securities recorded?

Answer 62

They are included in Other Comprehensive Income.

Question 63

# FAR What is a Fair Value Hedge? How is it recorded?

Answer 63

Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment Initially recorded on Balance Sheet at Fair Value Gains/Losses recorded on Income Statement

Question 64

# FAR What is a Cash Flow Hedge? How is it recorded?

Answer 64

Cash flow hedges protect from exposure to fluctuations in cash flows. Initially recorded on Balance Sheet at Fair Value Gains/Losses going to OCI Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.

Question 65

# FAR Where are gains and losses on foreign currency hedges recorded?

Answer 65

In Other Comprehensive Income (OCI)

Question 66

# FAR What disclosures are required for derivative transactions?

Answer 66

Objectives and Strategies Context to help investor understand the instrument Risk Management Policies Complete List of Hedged Instruments

Question 67

# FAR How do transactions denominated in in a currency other than a company's functional currency affect the income statement?

Answer 67

Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations

Question 68

# FAR What causes a Foreign Currency Transaction G/L?

Answer 68

A change in exchange rates between the functional currency and the transaction currency

Question 69

# FAR Where are Foreign Currency Transaction G/L recorded?

Answer 69

Income Statement

Question 70

# FAR Where are Foreign Currency Translation G/L recorded?

Answer 70

OCI

Question 71

# FAR If the Functional Currency equals the Local Currency - what rate is used for translating Assets and Liabilities?

Answer 71

Current Rate as of the Balance Sheet Date

Question 72

# FAR If the Functional Currency equals the Local Currency - what rate is used for translating Revenues and Expenses?

Answer 72

Weighted Average Exchange Rate for the year

Question 73

# FAR If the Functional Currency equals the Reporting Currency - what Exchangee Rate is used??

Answer 73

Use Weighted Average - Historical Exchange Rates (Inventory and Pre-paid Assets and Property Plant and Equipment) and Current Exchange Rates (Monetary Assets and Liabilities and Inventory @ Market and Trading Securities and Deferred Taxes)

Question 74

# FAR What is the primary objective of accounting?

Answer 74

To measure income

Question 75

# FAR What is the most authoritative set of accounting pronouncements?

Answer 75

The FASB Codification All pronouncements fall under the Codification umbrella

Question 76

# FAR What are the 2 Levels of Authority within the FASB codification?

Answer 76

Authoritative and Non-Authoritative

Question 77

# FAR How does managerial accounting differ from financial accounting?

Answer 77

Managerial Accounting has a timeliness focus Managerial Accounting is not required to follow GAAP

Question 78

# FAR Which financial reports are required to be filed with the SEC?

Answer 78

Form 10K - Annual and Audited Form 10Q - Quarterly and Reviewed

Question 79

# FAR What is the focus of financial reports for individual companies?

Answer 79

Focus is on the needs of users to help them make decisions and assessments about the company Does not make assessments of the economy

Question 80

# FAR What are the Primary Constraints of Financial Reporting?

Answer 80

Cost vs. Benefit Materiality

Question 81

# FAR What are the Secondary Constraints of Financial Reporting?

Answer 81

Consistency - Year vs. Year Comparability - Company vs. Company

Question 82

# FAR What are the Qualitative Characteristics of Financial Reporting?

Answer 82

Relevance & Faithful Representation Relevance - Makes a difference to the user Includes: Predictive Value - Future Trends Confirming Value - Past Predictions Materiality - Could affect User Decisions Faithful Representation Includes: Completeness - Nothing omitted that would impact the decision-making of a user Neutrality - Information is presented is without bias Free from Error - No material errors or omissions

Question 83

# FAR What are the Enhancing Qualitative Characteristics of Financial Reporting?

Answer 83

Comparability Verifiability Timeliness and Understandability Comparability - Allows users to compare different items among various periods Verifiability - Different people would reach a similar conclusion on the information presented Timeliness - Information is made available early enough to impact the decision making of users Understandability - Information is easy to understand

Question 84

# FAR How does Conservatism affect the recording of accounting transactions?

Answer 84

When an estimate is necessary due to uncertainty conservatism chooses the best option that won't overstate the financial position of the company

Question 85

# FAR What is an accrual?

Answer 85

Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet

Question 86

# FAR What is a deferral?

Answer 86

Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)

Question 87

# FAR What is recognition in accounting?

Answer 87

When an item is recorded and included in the financial statements

Question 88

# FAR Describe fair value with respect to an asset

Answer 88

The price you would receive if you sold the asset Assumes asset is at its highest and best value Assumes asset is sold at its most advantageous market to get the best price possible

Question 89

# FAR What market assumptions are made in a fair value assessment?

Answer 89

Buyer and Seller are not Related Buyer and Seller are Knowledgeable Buyer and Seller are able to transact - i.e. This isn't a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you're trying to value at $10M Buyer and Seller are both motivated to buy/sell

Question 90

# FAR What items are included in a Level 1 input in the fair value hierarchy?

Answer 90

Price quotes or market prices For example NYSE or NASDAQ

Question 91

# FAR What items are included in a Level 2 valuation input?

Answer 91

Interest rates Prime rate

Question 92

# FAR What items are included in Level 3 inputs of the fair value hierarchy?

Answer 92

Unobservable inputs such as assumptions or forecasts Lowest priority for valuation

Question 93

# FAR What are acceptable valuation techniques for fair value?

Answer 93

Market approach - uses market transactions and prices to value the asset Income approach - uses present value discounts earnings Cost approach - uses replacement cost to value the asset

Question 94

# FAR What are current assets?

Answer 94

Cash Inventory or Assets expected to be converted or consumed during a business' operating cycle Deferred Gross Profit on Installment Sales (Contra Asset) Receivables expected to be collected in 12 months or less

Question 95

# FAR What are current liabilities?

Answer 95

Liabilities that will use current assets during the present operating cycle

Question 96

# FAR What is an accrued liability?

Answer 96

Expense that has been incurred but not paid Example: rents payable

Question 97

# FAR What is a deferred revenue?

Answer 97

A type of current liability Payments that have been received but cannot be recorded as revenue yet Example: Tenant pre-pays rent - Landlord still must perform to earn it and is a liability until this happens

Question 98

# FAR When are revenues recognized?

Answer 98

When they have been earned; i.e. company has performed

Question 99

# FAR What is a gain?

Answer 99

Increase in equity from an activity or event that is not central to the main activities of the business Can be operating or non-operating

Question 100

# FAR What is a loss?

Answer 100

Decrease in equity from an activity or event that is not central to the main activities of the business Can be operating or non-operating

Question 101

# FAR What is an operating cycle?

Answer 101

Average time it takes to turn materials or services into Cash

Question 102

# FAR What is the present value of future cash flows?

Answer 102

Valuation method - the current value of a future amount of money using a specific interest rate

Question 103

# FAR What is historical cost?

Answer 103

How much an asset cost - (net of depreciation and amortization)

Question 104

# FAR What is replacement cost?

Answer 104

How much it would cost to reacquire an asset today (Entrance Cost)

Question 105

# FAR What is a market cost?

Answer 105

The sale price of an asset (Exit Cost)

Question 106

# FAR What is Net Realizable Value?

Answer 106

Sale Price of an Asset - Selling/Disposal Fee

Question 107

# FAR When is royalty income recognized? How is it recognized?

Answer 107

Recognized when earned If the royalty % is applied against net sales then subtract the estimated return amount from the gross sales first and then apply the royalty rate

Question 108

# FAR When is revenue recognized in an installment sale?

Answer 108

Revenue recognized upon receipt of cash Only used when cash collection is uncertain

Question 109

# FAR What is deferred gross profit?

Answer 109

Gross Profit that can't be recognized until cash is received D.GP : Gross Profit % x Accounts Receivable Pay attention to the year if GP% varies

Question 110

# FAR What is the cost recovery method?

Answer 110

No revenue recognized until all costs are recovered from purchase of the asset Most conservative method of revenue recognition when collection of sale price is uncertain

Question 111

# FAR What is subscription revenue? How is it recorded?

Answer 111

Payment has been received but performance is not complete. As company performs revenue is recognized. Recorded as a Deferred Revenue (Liability) on Balance Sheet

Question 112

# FAR How are franchise revenues recorded?

Answer 112

Franchisor - Startup franchise fee revenue deferred until substantial performance Franchisee - Costs are deferred until corresponding revenue is recognized

Question 113

# FAR How do you calculate sales revenue starting from cash basis income?

Answer 113

Mnemonic: SPEAR-BAR Sales (i.e. Customer Payments) + Ending Accounts Receivable - Beginning Accounts Receivable : Sales Revenue on an Accrual Basis

Question 114

# FAR How do you calculate COGS starting from Cash Basis?

Answer 114

Mnemonic: CRAP-I Cash Remitted (i.e. paid) +Increase in Accounts Payable -Increase in Inventory :COGS on an Accrual Basis

Question 115

# FAR How are discontinued operations reported? When are they used?

Answer 115

Reported Net of Tax after Continuing Operations but before Extraordinary Items Company decides to cease operating a segment of its business (represents a strategic shift and has major effect on operations and financials) Includes Income (or loss) from the period plus the gain (or loss) from disposal

Question 116

# FAR For discontinued operations, what are the three requirements for disposal assets?

Answer 116

They must be Held for Sale - Sold - or Disposed of another way

Question 117

# FAR What qualifies as an extraordinary item? How is it recorded?

Answer 117

Both unusual AND infrequent Reported Net of Tax after Discontinued Operations Note: Usual *or* Infrequent Items are reported as part of Continuing Operations

Question 118

# FAR What is constant dollar accounting?

Answer 118

Adjusts assets to reflect a consistent level of purchasing power due to inflation Uses the Consumer Price Index (CPI)

Question 119

# FAR When are expenses recognized?

Answer 119

When they are incurred. Accrue if not yet paid.

Question 120

# FAR What are accrued expenses?

Answer 120

Those incurred but not paid. Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale) Period costs - Expenses amortized and recognized with the passage of time

Question 121

# FAR When should impaired assets be written down to fair value and expensed?

Answer 121

Immediately.

Question 122

# FAR What major items should be classified under General & Administrative (G&A) expenses?

Answer 122

Office staff salaries Office/building rent Office supplies Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense not G&A

Question 123

# FAR What are business start-up costs?

Answer 123

One-time costs for opening a new business Expensed as they are incurred

Question 124

# FAR When is interest *not* expensed?

Answer 124

Interest on projects (software) for internal use is not expensed but is instead capitalized

Question 125

# FAR What are the major components of Comprehensive Income?

Answer 125

Net Income + Other Comprehensive Income (OCI): Revenues/Expenses Gains/Losses Cumulative accounting adjustments Reclassifications adjustments Non-owner changes in equity

Question 126

# FAR What items are considered cumulative accounting adjustments?

Answer 126

Foreign Currency Translation Adjustments Unrealized gains on AFS Securities Minimum Pension Liability adjustment for defined benefit plans

Question 127

# FAR What is the purpose of a reclassification adjustment?

Answer 127

Avoids double counting items that were included in both Net Income and OCI Example: AFS Securities previously included in OCI are now sold at a loss and reported on the Income Statement

Question 128

# FAR Where is Comprehensive Income reported?

Answer 128

Reported in a Single or Combined Income Statement

Question 129

# FAR What disclosures on accounting policies are required in financial statements?

Answer 129

Accounting Principles used Basis of Consolidation Inventory Pricing Methods Depreciation Method Amortization of Intangibles

Question 130

# FAR What are some major risks and uncertainties that must be disclosed?

Answer 130

Nature of Operations Use of Estimates and listing of Significant Estimates Concentration vulnerability

Question 131

# FAR Under Cash Basis Accounting how are Revenue and Expenses recognized?

Answer 131

Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow

Question 132

# FAR Is Cash Basis Accounting ok for Tax Returns?

Answer 132

Yes

Question 133

# FAR Is Cash Basis Accounting GAAP?

Answer 133

No - GAAP uses Accrual Accounting

Question 134

# FAR What is an advantage of Modified Cash Basis Accounting?

Answer 134

It avoids the complexities of GAAP but provides more information that Cash Basis Accounting

Question 135

# FAR Is Modified Cash Basis GAAP?

Answer 135

No - GAAP uses Accrual Accounting

Question 136

# FAR What are the 3 acceptable options for Income Tax Basis Accounting

Answer 136

Cash Basis - Accrual Basis - Hybrid Method

Question 137

# FAR What are the advantages of the Small and Medium Sized Entity Framework?

Answer 137

It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)

Question 138

# FAR What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?

Answer 138

Deferred Taxes Method and Taxes Payable Method

Question 139

# FAR What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?

Answer 139

Expensed or Amortized (15 years)

Question 140

# FAR How is Goodwill treated under the Small and Medium Sized Entity Framework?

Answer 140

Amortized (15 years)

Question 141

# FAR How are Research and Development costs recorded?

Answer 141

They are expensed in the period incurred and are not capitalized.

Question 142

# FAR Which expenditures are included in the cost of a building?

Answer 142

All expenditures to get the building into working condition are ready for use

Question 143

# FAR Which expenditures are included in the cost of land?

Answer 143

All expenditures to get the land ready for its intended use: Title & County Fees Clearing of Land - Dirt work etc. Demolition and removal of old buildings (minus any scrap or salvage) Note: capitalized land costs are not depreciated

Question 144

# FAR In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?

Answer 144

If the cash flows from the assets exchanged are not significantly different no gain or loss is recognized on a non-monetary exchange as it lacks commercial substance. The new asset is recorded at the book value of the asset given up. The only gain that can be recognized is any boot (cash) received.

Question 145

# FAR In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

Answer 145

If resulting cash flows are significantly different then the transaction has commercial substance and a gain/loss is recorded on the exchange. The new asset is recorded at the FAIR VALUE of the assets given up unless the asset acquired has a fair value that is easier to determine.

Question 146

# FAR How is donated property recorded by the donee?

Answer 146

Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value

Question 147

# FAR How is donation of property recorded by the donor?

Answer 147

Recorded at Fair Value of asset given up. Gain or Loss is recorded.

Question 148

# FAR How is double-declining balance (DDB) depreciation calculated?

Answer 148

(1 / Useful Life) x 2 x Book Value Ignore salvage value.

Question 149

# FAR How is Sum of Year's Digits (SYD) depreciation calculated?

Answer 149

(Cost - Salvage Value) x (Remaining Useful Life / SYD) : Depreciation expense For example the depreciation factor for the third year of a 10-year asset would be: : 8 / (10+9+8+7+6+5+4+3+2+1) : 8/55 : 14.5% Remaining useful life : 8 SYD : 55

Question 150

# FAR How is straight line depreciation calculated?

Answer 150

(Cost - Salvage Value) / Useful life : depreciation expense

Question 151

# FAR When is an asset considered to be impaired? How is impairment loss calculated?

Answer 151

When the un-discounted future cash flows are less than the carrying value of the asset. Carrying Value - Fair Value : Impairment Loss Note: impaired assets that recover their value can't be written back up once written down

Question 152

# FAR How are legal fees to defend a patent amortized?

Answer 152

If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent's economic life. If unsuccessful they are expensed immediately.

Question 153

# FAR What are the two steps for testing goodwill impairment?

Answer 153

Compare the CV to the FV. If FV is greater than CV no impairment exists you're done. If impairment appears to exist the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.

Question 154

# FAR How are costs for developing software recorded?

Answer 154

Expenses prior to technological feasibility are expensed as R&D. After technological feasibility but prior to production costs are capitalized. Expenses incurred during production are charged to inventory. Expenses incurred training on internal use software are expensed.

Question 155

# FAR What expenditures are included in the cost of equipment?

Answer 155

All expenditures to get the asset into working condition and ready for use: ``` Purchase price + liabilities assumed Shipping Taxes Insurance Installation Testing Legal fees Construction loan interest ``` Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.

Question 156

# FAR What are the three major types of funds in governmental accounting?

Answer 156

Governmental, Proprietary, Fiduciary

Question 157

# FAR Which two accounting bases are used in governmental accounting?

Answer 157

Accrual basis - current economic resources focus (revenues recognized when earned) Modified accrual basis - current financial resources focus (revenues recognized when available and measurable)

Question 158

# FAR What is a budget appropriation?

Answer 158

The highest amount allowed for a particular expenditure under a budget.

Question 159

# FAR What is an encumbrance?

Answer 159

Records purchase and reserves it for the encumbrance.

Question 160

# FAR What is the opening budgetary entry?

Answer 160

Dr Estimated Revenues Control Cr Appropriations Control Dr/Cr Budgetary Fund Balance (plug)

Question 161

# FAR What is the closing budgetary entry?

Answer 161

Dr Appropriations Control Dr/Cr Budgetary Fund Balance (plug) Cr Estimated Revenues Control

Question 162

# FAR What are the types of governmental funds?

Answer 162

``` General Fund Special Revenue Fund Permanent Fund Capital Projects Fund Debt Service Fund ```

Question 163

# FAR What is a General Fund?

Answer 163

The operating fund of the governmental unit Records Significant Revenues: Taxes; Tickets; Fines; Licenses Records Significant Expenditures: Police; Education; Fire Dept

Question 164

# FAR What is a Special Revenue Fund?

Answer 164

Restricted for a specific purpose such as street repair.

Question 165

# FAR What is a Permanent Fund?

Answer 165

Legally restricted fund; where only earnings can be used to fund programs. Principal remains intact.

Question 166

# FAR What is a Capital Projects Fund?

Answer 166

Used to acquire and build facilities.

Question 167

# FAR What is a Debt Service Fund?

Answer 167

Handles repayment of long-term debt and related interest.

Question 168

# FAR Which fund statements are issued in Governmental Accounting?

Answer 168

Balance Sheet Statement of Revenues; Expenditures; and Changes in Fund Balance

Question 169

# FAR When is Revenue recorded in Governmental Accounting?

Answer 169

When it is BOTH available and measurable; regardless of when it is spent.

Question 170

# FAR What is Derived Tax Revenue?

Answer 170

Money collected from people doing things: Sales tax (buying cars) or income tax (people working)

Question 171

# FAR What is Imposed Tax Revenue?

Answer 171

Tax assessed just because things exist Example: property tax on a car (even if it's never driven); real estate tax Recorded as a revenue when BUDGETED. Estimated uncollectible property tax revenues don't offset revenues; so don't net them.

Question 172

# FAR What are the types of Proprietary Funds?

Answer 172

Internal Service Funds - to serve the needs of other governmental units (i.e. motor pool) Enterprise Funds - provide goods or services to external users (i.e. post office)

Question 173

# FAR What are the Fund Balance Types?

Answer 173

``` Restricted - Restricted by Contributor Committed - Restricted by Government Assigned - Intended for a purpose Unassigned - Available to be spent Non-spendable - Not in a spendable state ```

Question 174

# FAR What are the types of Fiduciary Funds?

Answer 174

Agency Fund - government acts as an agent or custodian Pension Trust Fund - Government is a trustee for a pension plan Investment Trust Fund - Government is a trustee over a series of investments Private Purpose Trust - Trust that benefits various individuals and entities

Question 175

# FAR How are Assets & Liabilities presented on the Statement of Net Position?

Answer 175

Assets (Current & Non-Current) Deferred Outflows of Resources Liabilities (Current & Non-Current) Deferred Inflows of Resources

Question 176

# FAR How are Capital Assets shown on a governmental Statement of Net Assets?

Answer 176

They are shown net of debt Asset Cost - Accumulated Depreciation - Asset Liabilities : Net Assets

Question 177

# FAR How is infrastructure reported on a governmental Statement of Net Assets?

Answer 177

Modified approach: Reported at cost; no accumulated depreciation

Question 178

# FAR How is a Statement of Net Assets divided?

Answer 178

Into Governmental Activities and Business Activities

Question 179

# FAR How are activities presented in a Statement of Activities?

Answer 179

They are divided by function If the activities of a component are distinguishable from the rest of the governmental entity; then discreet presentation is required If the activities of the component cannot be identified and separated from the rest of the governmental activities; then blended presentation is warranted. Component units are reported in the Entity-Wide Financial Statements and not the Fund Financial Statements.

Question 180

# FAR What is the primary objective of governmental accounting?

Answer 180

To provide information that is useful and benefits a wide range of users including: Costs of services provided Sufficiency of revenues to cover costs Financial position of entity

Question 181

# FAR What Financial Statements are required for Defined Benefit Pension plans?

Answer 181

Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position

Question 182

# FAR What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?

Answer 182

Assets; Deferred Outfows; Liabilities; Deferred Outflows; Fiduciary Net Position

Question 183

# FAR What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?

Answer 183

Additions (Contributions and Net Investment Income) - Deductions (Benefits Payments and Admin Expense) : Net Change in Fiduciary Net Position

Question 184

# FAR What should be included in the Financial Statement notes for Defined Benefit Pension Plans?

Answer 184

Types of Benefits; Plan Member Classes; Board Information; Investment Policies and FV Determination

Question 185

# FAR Which organization's standards are the most authoritative in the hierarchy of international accounting?

Answer 185

The International Accounting Standards Board (IASB)

Question 186

# FAR Where is the first place management should look for guidance on international recognition and accounting policies?

Answer 186

The International Financial Reporting Standards (IFRS) issued by the IASB

Question 187

# FAR Which framework helps to develop standards for international accounting?

Answer 187

The IASB Framework * The framework is NOT a standard itself * The framework does not supersede any standard's authority

Question 188

# FAR What is the objective of the IFRS framework?

Answer 188

To provide users with information on international accounting.

Question 189

# FAR Which assumptions are followed within the IRFS framework?

Answer 189

Entity is a Going Concern | Entity uses the accrual basis of accounting.

Question 190

# FAR What are the Qualitative Characteristics of accounting information within IFRS?

Answer 190

Relevance & Faithful Representation Relevance - Makes a difference to the user Includes: Predictive Value - Future Trends Confirming Value - Past Predictions Faithful Representation Includes: Completeness - Nothing omitted that would impact the decision-making of a user Neutrality - Information is presented is without bias Free from Error - No material errors or omissions

Question 191

# FAR What are the Enhancing Characteristics of IFRS?

Answer 191

Comparability - Allows users to compare different items among various periods Verifiability - Different people would reach a similar conclusion on the information presented Timeliness - Information is made available early enough to impact the decision making of users Understandability - Information is easy to understand

Question 192

# FAR How does comparability differ under GAAP versus IFRS?

Answer 192

Comparative information from prior year is required under IFRS. GAAP requires that if multiple years are presented they are consistently prepared however it doesn't require prior year comparative statements.

Question 193

# FAR What is the Pervasive Constraint within IFRS?

Answer 193

Cost vs. Benefit

Question 194

# FAR Which items are considered reporting elements under IFRS?

Answer 194

``` Asset Liability Equity Income Expense ```

Question 195

# FAR What are the criteria for recognition on IFRS financial statements?

Answer 195

Probable future economic benefit Can be measured reliably If the value or outcome cannot be measured reliably IFRS requires the use of the Cost Recovery Method.

Question 196

# FAR When transitioning to IFRS what type of financial statement must be produced for the first reporting period?

Answer 196

A full comparative statement using IFRS.

Question 197

# FAR If IFRS was implemented in June 2012 for use in the December 31 2012 financial statements what is the Date of Transition?

Answer 197

January 1 2011 because a full year of comparative statements is required from the previous year

Question 198

# FAR For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?

Answer 198

The Fair Value election

Question 199

# FAR Where on the financial statements are adjustments for adopting to IFRS made?

Answer 199

In the entity's retained earnings or equity

Question 200

# FAR How is going concern different under IFRS than from GAAP?

Answer 200

Going Concern is an assumption under IFRS

Question 201

# FAR How are extraordinary items treated under IFRS?

Answer 201

IFRS doesn't allow extraordinary items.

Question 202

# FAR How is the completed contract method used under IFRS?

Answer 202

Completed contract method is not allowed under IFRS.

Question 203

# FAR How is LIFO treated under IFRS?

Answer 203

IFRS does not allow LIFO.

Question 204

# FAR Which financial statements are required under IFRS?

Answer 204

Statement of Comprehensive Income Statement of Changes in Equity

Question 205

# FAR How is the term income used in IFRS?

Answer 205

Income is used instead of revenue and encompasses BOTH revenue and gains.

Question 206

# FAR How is the term profit used in IFRS?

Answer 206

In IFRS the term profit is used instead of Net Income.

Question 207

# FAR How does IFRS treat gains?

Answer 207

They are treated the same as revenue and are not separated on the financial statements.

Question 208

# FAR How does IFRS treat losses?

Answer 208

In IFRS losses are treated the same as expenses but they ARE separated on the financial statements.

Question 209

# FAR How does refinancing of current liabilities to long-term liabilities under IFRS differ from GAAP?

Answer 209

Under IFRS current liabilities can only be refinanced into a non-current liability if the refinance agreement is EXECUTED prior to the balance sheet date. GAAP requires only *intent* to refinance not actual execution.

Question 210

# FAR How do contingent liabilities differ between GAAP and IFRS?

Answer 210

Under GAAP there are three classifications of contingent liabilities - Probable Reasonably Possible and Remote. Under IFRS contingencies are uncertain future events and are classified as a provision if probable and measurable even if uncertain in timing or amount.

Question 211

# FAR How are bonds recorded under IFRS?

Answer 211

Bonds may be recorded on the Statement of Financial Position using one of two methods Fair Value through profit or loss * Liability revalued at the end of each period * Gain or Loss recognized in period Amortized Cost *Using Effective Interest Method

Question 212

# FAR How are deferred taxes treated under IFRS?

Answer 212

They use the liability method - all deferred tax liabilities must be reported but only probable deferred tax assets can be reported. They are non-current on the statement of financial position.

Question 213

# FAR When can deferred tax assets and liabilities be netted under IFRS?

Answer 213

ONLY if they are related to the same country/taxing authority For example China Deferred Tax Assets can't offset Japan Deferred Tax Liabilities

Question 214

# FAR Which tax rates are used for calculating deferred tax assets/liabilities under IFRS?

Answer 214

The enacted rate or substantially enacted tax rate. | GAAP is the enacted tax rate only

Question 215

# FAR Which items are recorded on the Income Statement in IFRS?

Answer 215

``` Income Finance Costs Tax Expense Discontinued Ops Profit/Loss Non-controlling interest in Profit/Loss Net profit/loss attributable from equity ```

Question 216

# FAR How are property plant and equipment (PP&E) recorded and valued under IFRS?

Answer 216

Recorded at cost Valued using either: Cost model - asset carried at cost less accumulated depreciation and impairment loss Revaluation model - asset adjusted to fair value less accumulated depreciation

Question 217

# FAR What are the requirements for using the revaluation model for PP&E under IFRS?

Answer 217

Asset must be able to be reliably measured Must be applied to whole class of assets not just one asset No guidance on how often assets should be revalued under IFRS

Question 218

# FAR How is investment property reported under IFRS?

Answer 218

Initially recorded at cost Revalued using either Fair Value model or Cost model

Question 219

# FAR How is profit or loss recorded in the current period for investment property under the Fair Value model of IFRS?

Answer 219

Recorded on the Income Statement Investment P/L : IS PP&E P/L : OCI

Question 220

# FAR Under IFRS how is investment property reported under the Cost Model?

Answer 220

Carried at Cost minus Accumulated Depreciation Fair Value must still be disclosed in the notes to the financial statements

Question 221

# FAR How are leases reported under IFRS?

Answer 221

Operating Leases can be recorded as Investment Property if measured at Fair Value All other investment property must use Fair Value Model if one asset uses it

Question 222

# FAR How are intangible assets valued under IFRS?

Answer 222

Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss) or the Revaluation Model (Fair Value less Accumulated Depreciation)

Question 223

# FAR How is internally generated goodwill reported under IFRS?

Answer 223

It is not recognized.

Question 224

# FAR How is amortization of intangibles handled under IFRS?

Answer 224

If asset has a finite life it is amortized over useful life. If asset has indefinite life it is not amortized but is tested for impairment at the reporting date.

Question 225

# FAR When must a lease be recorded as a Finance Lease under IFRS?

Answer 225

If the substantial risks of ownership have passed to the Lessee then the Lease must be accounted for as a Finance Lease

Question 226

# FAR How are defined benefit plans recorded under IFRS?

Answer 226

Project-unit-credit method calculates the PV of the defined benefit obligation

Question 227

# FAR How are interest expense and/or finance costs classified on an IFRS statement of cash flows?

Answer 227

They can be classified as either Operating or Financing Once a classification is chosen all future costs must be classified there

Question 228

# FAR How are significant non-cash transactions recorded on an IFRS statement of cash flows?

Answer 228

They must be included in the notes to the financial statements.

Question 229

# FAR Which costs are inventoriable?

Answer 229

Purchases - Net of Discounts, Freight, Warehouse expenditures

Question 230

# FAR When does ownership of goods transfer when shipped FOB Shipping Point?

Answer 230

FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock

Question 231

# FAR When does ownership transfer when goods are sent FOB Destination?

Answer 231

FOB Destination keeps the items in the seller's inventory until it reaches the buyer

Question 232

# FAR Which costs are non-inventoriable?

Answer 232

Sales Commissions Interest on liabilities to vendors Shipping expense to customers

Question 233

# FAR When are discounts recorded under the gross method?

Answer 233

Under the gross method, discounts are recorded only when used.

Question 234

# FAR Under the net method, when are discounts recorded?

Answer 234

Under the net method, discounts are recorded whether used or not. Unused discounts are allocated to financing expense.

Question 235

# FAR How is gross margin calculated?

Answer 235

Gross Margin : Sales - COGS (BI + P - EI)

Question 236

# FAR Describe the periodic inventory system.

Answer 236

Inventory is counted at certain times throughout the period Weighted-average cost flow method is used.

Question 237

# FAR Describe the perpetual inventory system.

Answer 237

Inventory count continually updated Uses a moving-average cost flow method

Question 238

# FAR In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

Answer 238

Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.

Question 239

# FAR How is inventory turnover calculated?

Answer 239

COGS / Average Inventory

Question 240

# FAR How is Average Day's Sales in inventory calculated?

Answer 240

365 / Inventory Turnover

Question 241

# FAR Under a consignment system, who holds the consigned goods in inventory?

Answer 241

The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.

Question 242

# FAR Under a consignment system, does the consignee hold consignment inventory in their own inventory?

Answer 242

No. Consignment goods are maintained in the inventory of the consignor, not the consignee.

Question 243

# FAR What effect does overstatement or understatement of inventory have on ending retained earnings?

Answer 243

Misstatement of beginning inventory does NOT have an effect on ending retained earnings. Misstatement of ENDING inventory does have an effect on retained earnings.

Question 244

# FAR How does misstatement of ending inventory effect Ending Retained Earnings?

Answer 244

EI Over : COGS Under : ERE Over EI Under : COGS Over : ERE Under

Question 245

# FAR Which costs are included in COGS first under the FIFO (first in first out) system?

Answer 245

The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1 This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes

Question 246

# FAR Which costs are included in COGS under the LIFO (last in first out) system?

Answer 246

The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50

Question 247

# FAR How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

Answer 247

COGAS / Total Units : Weighted Average Cost Per Unit

Question 248

# FAR How does FIFO's COGS relate to LIFO's in a time of changing prices?

Answer 248

FIFO's relationship to COGS will be opposite LIFO's relationship to COGS in periods of falling/rising prices.

Question 249

# FAR How do FIFO and LIFO change in a period of rising prices?

Answer 249

FIFO has the Lowest COGS FIFO is a cat that sees a mouse starts Low and is Rising If COGS is Low, that means EI is High

Question 250

# FAR How do FIFO and LIFO change in a period of falling prices?

Answer 250

FIFO has the Highest COGS Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch If COGS is High, that means EI is Low

Question 251

# FAR Under a Lower of Cost or Market, how are the benchmarks calculated?

Answer 251

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs Market : Replacement Cost Market Floor : Net Realizable Value - Normal Profit

Question 252

# FAR How are Available-For-Sale securities recorded on the Balance Sheet?

Answer 252

At Fair value as either Current or Non-current assets.

Question 253

# FAR How are Available-For-Sale security Unrealized G/L treated?

Answer 253

Included in OCI (Other Comprehensive Income)

Question 254

# FAR How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?

Answer 254

HTM - Stockholder's Equity / Trading Securities - Current Period.

Question 255

# FAR How are Held-to-Maturity securities recorded on the Balance Sheet?

Answer 255

Amortized cost as Current or Non-current assets. If reclassified as AFS - Unrealized G/L go to Stockholder's Equity If reclassified as Trading Securities - Unrealized G/L recognized in Current Period

Question 256

# FAR How are Held-to-Maturity securities Unrealized G/L treated?

Answer 256

Trick question - Unrealized gains or losses are not applicable because they are HTM

Question 257

# FAR How are Trading Securities recorded on the Balance Sheet?

Answer 257

At Fair Value as a Current Asset Unrealized gains/losses are recorded on the Income Statement If they are reclassified as held-to-maturity or available-for-sale- there is no effect upon transfer.

Question 258

# FAR How are Trading Securities Unrealized G/L treated?

Answer 258

Recorded on the Income Statement If they are reclassified as HTM or AFS - there is no effect upon transfer.

Question 259

# FAR How is a Capital Lease recorded?

Answer 259

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

Question 260

# FAR What footnote disclosures are required for a Capital Lease?

Answer 260

Future minimum rental commitments By year - for 5 years All remaining years as a group

Question 261

# FAR What are the requirements for a Capital Lease for a lessor?

Answer 261

Same as for lessee (Title- BPO or Substance)- PLUS: Collectability of lease payments is predictable No uncertainties about the lessor reimbursing the lessee for costs incurred

Question 262

# FAR What are the characteristics of an Operating Lease for a lessee?

Answer 262

Risk of ownership does NOT pass No asset or liability is recorded on the financial statements Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement's life.

Question 263

# FAR What are the characteristics of an Operating Lease for a LESSOR?

Answer 263

Rent revenue recorded Leased property remains an asset and depreciated by lessor If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis

Question 264

# FAR What are the characteristics of a Direct Financing Lease?

Answer 264

Interest Revenue (or expense for lessor) decreases with passage of time Principal amount increases with each payment Carrying amount of Lease decreases

Question 265

# FAR How is a sale-leaseback recorded?

Answer 265

Any profit on the sale is deferred and amortized Exception: If PV of lease payments is 10% or less of the asset's FMV- the gain is recognized If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments

Question 266

# FAR What are the characteristics of lease payments under an annuity due situation?

Answer 266

Payments begin at the start of the lease period Think: Rent/Mortgage payments are Due at the first of the month

Question 267

# FAR What are the characteristics of lease payments under an ordinary annuity situation?

Answer 267

Payments begin after the end of the first year Think: An annuity that pays you at the end of each year

Question 268

# FAR What are the characteristics of a Capital Lease for a lessee?

Answer 268

Risk of ownership passes to lessee by: Title, Bargain Purchase Option (BPO), Substance - Lease is more than 75% of asset's useful life or PV of minimum lease payments are more than 90% of fair value

Question 269

# FAR Which financial statements are required for not - for - profit organizations?

Answer 269

Statement of Financial Position Statement of Activities Statement of Cash Flows Statement of Functional Expense (Volunteer Health Organizations Only)

Question 270

# FAR What are the major classifications found on a Statement of Financial Position?

Answer 270

Similar to Balance Sheet: Assets Liabilities Net Assets Unrestricted Assets Permanently Restricted Assets Temporarily Restricted Assets

Question 271

# FAR What are the major classifications in a Statement of Activities?

Answer 271

Similar to an Income Statement - organization - wide: Revenues Expenses - ONLY deducted from Unrestricted Revenues Gains and Losses Changes in Net Asset classes Unrestricted Permanently Restricted Temporarily Restricted

Question 272

# FAR What are the characteristics of a Statement of Cash Flows for not - for - profits? What are the major classifications?

Answer 272

Both direct and indirect methods are OK Operating Activities - Unrestricted Revenues and Unrestricted Expenses Investing Activities Financing Activities - Endowments and restricted contributions

Question 273

# FAR Which organizations are required to present a Statement of Functional Expenses?

Answer 273

Volunteer Health Organizations

Question 274

# FAR Which statements are required for non - governmental hospitals?

Answer 274

Balance Sheet Statement of Operations Statement of Changes in Net Assets Statement of Cash Flows Financial Statement Notes

Question 275

# FAR Which basis of accounting is used for revenues and net assets?

Answer 275

Accrual basis of accounting is used Only external parties can restrict the use of assets (permanent or temporary) Assets earmarked internally by management are still classified as unrestricted

Question 276

# FAR What are the characteristics of unrestricted assets or revenue?

Answer 276

No restrictions or conditions placed on entity in order to use the resources Note: assets earmarked internally by management are still unrestricted

Question 277

# FAR When are revenues on contributions recognized?

Answer 277

Revenues on contributions are recognized in the year received - not the year the contribution is spent and are recorded at Fair Value on the date received

Question 278

# FAR When are services rendered considered contributions?

Answer 278

If the organization would have otherwise paid for them or They increase the value of a non - monetary asset

Question 279

# FAR Is hospital charity care revenue?

Answer 279

NO. It is disclosed in the notes to the financial statements only.

Question 280

# FAR How are unconditional pledges to contribute recorded?

Answer 280

Classified as revenue in the current year only - multi - year future contributions fall under Temporarily Restricted.

Question 281

# FAR Which revenues are expenses deducted from?

Answer 281

Expenses ONLY deducted from Unrestricted Revenues - not Temporary or Permanently Restricted Revenues/Assets

Question 282

# FAR What are the characteristics of temporarily restricted assets/revenue?

Answer 282

Use is restricted to a future time - which could then convert to unrestricted - Class: Temp. Restricted Revenue Unrestricted contributions promised (including multi - year contributions) - but not yet received are actually restricted by time and are therefore classified as Temporarily Restricted Assets - Multi - year contributions are recorded at the present value of the future contributions

Question 283

# FAR What are the characteristics of an endowment?

Answer 283

Use of investment is restricted - but income from investment could be either restricted or unrestricted Must be under control of receiving entity (Quasi Endowment) in order to be recorded in unrestricted net assets Otherwise - a memo entry is recorded

Question 284

# FAR When is the donation of an art collection recognized as a contribution or asset?

Answer 284

Not recognized as assets or contribution revenue if they are held of display or education' or their sale results in the purchase of similar items

Question 285

# FAR When both Temporarily Restricted Assets and Unrestricted Assets are available for use - which assets are used first?

Answer 285

Temporarily restricted assets are used before Unrestricted assets.

Question 286

# FAR How is a refundable advance recorded by a not for profit?

Answer 286

Classified as a Liability Promise to contribute assets pending on certain conditions being met Becomes unconditional once the possibility that it won't happen is remote

Question 287

# FAR How are investments recorded and valued in not - for - profit accounting?

Answer 287

Fair Value is mostly used Exception - Equity method used when significant influence exists

Question 288

# FAR How are scholarships recorded?

Answer 288

As a reduction of revenue - netted against college's tuition

Question 289

# FAR How is depreciation expense recorded by a not - for - profit?

Answer 289

Depreciation expense is allocated proportionately to various functions

Question 290

# FAR How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

Answer 290

Calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability

Question 291

# FAR If no goodwill is recorded upon admission of a new partner - which method is used for recording the new partner's interest?

Answer 291

The bonus method: Old Partnership Equity + New Partner Contribution : New Partnership Equity x New Partner % : New Partner Equity Amount New Partner Contribution - New Partner Equity Amount : Bonus to Prior Partners using same allocation as P/L

Question 292

# FAR If goodwill is recorded upon admission of a new partner - how is the partner's interest recorded?

Answer 292

Using the goodwill method: New Contribution / New Equity % : Partnership Value Implied Value of Partnership - Capital Accounts of all partners : Goodwill to Old Partners Under the Goodwill Method - the new Partner is paying an amount for a certain percentage stake in the partnership. For instance if they pay $1000 for a 25% stake - then it is assumed that the Partnership is worth $4 -000 ($1 -000/25%)

Question 293

# FAR At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?

Answer 293

Fair Value for assets contributed. Present value of remaining cash flows for liabilities assumed.

Question 294

# FAR Which Personal Financial Statements are required?

Answer 294

Required: Statement of Financial Condition (Statement of Changes in Net Worth is optional)

Question 295

# FAR How are assets and liabilities valued in a Personal Financial Statement?

Answer 295

Estimated current value

Question 296

# FAR How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a Personal Financial Statement?

Answer 296

Presented on Statement of Financial Condition between Liabilities and Net Worth

Question 297

# FAR What is the general presentation on a statement of financial condition?

Answer 297

Assets - Liabilities - Estimated taxes on assets sold : Net Worth

Question 298

# FAR How is life insurance presented on a Personal Financial Statement?

Answer 298

Only shown if there is cash surrender value It is shown net of loans against the policy

Question 299

# FAR How are business interests shown on a Personal Financial Statement?

Answer 299

Business Interests that constitute a large percentage of total assets should be separated from other investments

Question 300

# FAR What is the discreet view in an Interim Financial Statement?

Answer 300

Interim period is a separate accounting period - not GAAP Same accounting principles used for annual reporting should be used.

Question 301

# FAR What is the integral view in an Interim Financial Statement?

Answer 301

Interim period is a part of the annual period - GAAP Gross profit method may be used to estimate COGS and inventory Temporary declines in inventory aren't recognized

Question 302

# FAR How are discontinued operations & extraordinary items reported in Interim Financial Statements?

Answer 302

Aren't prorated Fully recognized in Interim Period as incurred If it occurs in Q3 - it's recognized in Q3

Question 303

# FAR How are cumulative gains and losses reported in Interim Financials?

Answer 303

Reported as if they occurred in the first quarter

Question 304

# FAR How is inventory valuation handled in Interim Financials?

Answer 304

If inventory experiences a decline in value during an interim period - the loss is recognized in the interim period If the loss is expected to be only temporary - no loss is recognized

Question 305

# FAR What is one of the primary problems with interim reporting?

Answer 305

The matching principle gets messed up - Expenses incurred in one period may benefit future periods

Question 306

# FAR For whom is Segment Reporting required?

Answer 306

Publicly traded companies

Question 307

# FAR What factors cause a segment to be significant and therefore to be reported separately?

Answer 307

Revenue of segment is 10% or more of total Profit is 10% or more of total Segment assets are 10% or more of total 75% Test - All segment revenues must equal 75% of total external revenues

Question 308

# FAR What is the disclosure requirement regarding sales of 10% or more for one customer?

Answer 308

If 10% or more of enterprise revenue comes from one customer - the segment making the sales must be disclosed

Question 309

# FAR What items are included in operating activities on the Statement of Cash Flows?

Answer 309

Cash received from Customers- Interest & Dividends- Trading Securities Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities

Question 310

# FAR What items are included in investing activities on a Statement of Cash Flows?

Answer 310

Cash received: Sale of PP&E- Sale of Investments- Loan Principle Cash paid: Loans- Acquisitions- AFS or HTM Securities- Taxes- Trading Securities

Question 311

# FAR What items are included in Financing Activities in a Statement of Cash Flows?

Answer 311

Cash received: Issuance of Stock- Issuance of Debt Cash paid: Dividends

Question 312

# FAR What is the direct method for a Statement of Cash Flows?

Answer 312

Starts with Income from Continuing Operations Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses If used- the Indirect Method must also be shown

Question 313

# FAR What is the Indirect Method for a Statement of Cash Flows?

Answer 313

Starts with Net Income Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses

Question 314

# FAR When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

Answer 314

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

Question 315

# FAR When is APIC recorded on a stock subscription?

Answer 315

APIC increases on date subscription is recorded - not on the date paid for or issued

Question 316

# FAR To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

Answer 316

It will be restricted to the extent of the balance in the Treasury Stock account.

Question 317

# FAR When are dividends in arrear recorded for cumulative preferred stock?

Answer 317

They are not accrued until declared.

Question 318

# FAR When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

Answer 318

If a year passes and no Cumulative Preferred Stock is declared- then the dividends in arrears are included as a disclosure - not an accrual in the Financial Statements.

Question 319

# FAR What is the gain or loss when a non-monetary asset is distributed to a shareholder?

Answer 319

The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company's books

Question 320

# FAR What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

Answer 320

The effect on Retained Earnings is the Carrying Amount of the asset RE will be debited when the dividend is declared for the FMV of the asset- which is more (or less) than the carrying amount Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash The net effect of the entry is that RE will decrease by the CV of the asset

Question 321

# FAR When is Retained Earnings debited for FMV of Stock for a stock dividend?

Answer 321

When Stock Dividend is less than 25% of Common Stock outstanding

Question 322

# FAR When is Retained Earnings debited for Par Value for a stock dividend?

Answer 322

When Stock Dividend is greater than 25% of common stock outstanding

Question 323

# FAR What is the effect of a stock dividend or a stock split on total shareholder equity?

Answer 323

Stock dividends and stock splits both have no effect on Total Shareholder Equity

Question 324

# FAR What is the affect on APIC from a stock split?

Answer 324

Stock splits only affect par value - APIC remains the same.

Question 325

# FAR When is compensation expense recorded at the time of grant for a stock option?

Answer 325

Compensation expense is recorded at the time of grant if options are exercisable immediately They are based on past service. Expense recognized : FV Stock Option x # of Shares

Question 326

# FAR What interest rate is used to discount stock options?

Answer 326

The risk-free interest rate

Question 327

# FAR What date is used as the measurement date for share-based payments classified as liabilities?

Answer 327

The settlement date.

Question 328

# FAR How are compensation costs for share-based payments classified as liabilities measured?

Answer 328

Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period

Question 329

# FAR What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

Answer 329

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

Question 330

# FAR What is the primary purpose of a quasi-reorganization?

Answer 330

To eliminate a deficit balance in RE by restating its assets to Fair Value It does not directly protect a company from its creditors

Question 331

# FAR How is return on Common Stockholder's Equity calculated?

Answer 331

(Net Income - P/S Dividends) / Average Common Stockholders Equity Note: Average CSE : Common Stock + RE

Question 332

# FAR How is book value per share of common stock calculated?

Answer 332

Total Shareholder Equity - Total Preferred Stock - P/S Dividends in Arrears - P/S Liquidation Premium :Total Book Value Book Value per Share : Total Book Value / Shares outstanding

Question 333

# FAR How is the dividend per share payout ratio calculated?

Answer 333

Dividends per share / earnings per share

Question 334

# FAR How is basic Earnings Per Share (EPS) calculated?

Answer 334

(Net Income - Preferred Dividends) / Average C/S Outstanding Note - If cumulative- subtract the P/S dividend regardless of whether or not they're declared.

Question 335

# FAR For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

Answer 335

For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year

Question 336

# FAR For which areas is EPS required to be shown?

Answer 336

EPS is only required to be shown for Income from Continuing Operations and Net Income. All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes

Question 337

# FAR When do stock options increase share outstanding?

Answer 337

Only if they are dilutive. Their exercise price is LESS than the market value If not- you ignore them in the calculation

Question 338

# FAR How is EPS calculated when convertible bonds are taken into consideration?

Answer 338

[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents) Bond interest is added back because if converted- there would be no bond interest expense Contingent Issue Agreements are included in Diluted EPS if contingency is met

Question 339

# FAR How are changes in accounting principle applied?

Answer 339

Retrospective Application: Prior Periods adjusted Retained Earnings adjusted Completed Contract to % Completion Ex: LIFO to FIFO

Question 340

# FAR Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate? How would it be applied?

Answer 340

A change of principle. Applied retrospectively.

Question 341

# FAR Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate? How would this change be applied?

Answer 341

A change in accounting principle. Applied retrospectively.

Question 342

# FAR How is a change in accounting estimate applied?

Answer 342

A change in accounting estimate is applied prospectively (going forward). No backwards adjustment is made.

Question 343

# FAR Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate? How would this change be applied?

Answer 343

Change in depreciation method would be a change in accounting estimate. It is applied prospectively.

Question 344

# FAR How is a correction of an accounting error made?

Answer 344

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements. The correction of the error must be included in the footnotes.

Question 345

# FAR What are the requirements for a prior period adjustment?

Answer 345

Effect is Material Is identifiable in Prior Period Couldn't be estimated in Prior Periods

Question 346

# FAR How is a change from a non-GAAP accounting method to a GAAP method recorded?

Answer 346

It is treated as a correction of an accounting error. Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements Correction of the error must be included in the footnotes

Question 347

# FAR How does an inventory error effect the financial statements?

Answer 347

Effect on Ending Inventory : Effect on Net Income If one is overstated- both overstated. If one is understated- both understated. Misstating inventory corrects itself after TWO periods.

Question 348

# FAR How is a change in entity recorded?

Answer 348

Applied retrospectively. All prior periods presented for comparative purposes must reflect the change Footnote disclosures must be made Changing to Consolidated Statements

Question 349

# FAR What is a serial bond?

Answer 349

Any bond that matures in installments

Question 350

# FAR What is a term bond?

Answer 350

Any bond that matures on a single date

Question 351

# FAR What is a debenture bond?

Answer 351

A bond not secured by any collateral

Question 352

# FAR What is a sinking fund bond?

Answer 352

Cash is held in a sinking fund for repayment of bond at maturity 5 years of requirements and maturity details should be disclosed

Question 353

# FAR What is the formula to calculate proceeds of a bond sale?

Answer 353

Present Value of the principal payment at maturity + Present Value of Interest Payments made : Market Value of Bond Proceeds

Question 354

# FAR How is the present value of a bond calculated?

Answer 354

Step 1: PV of $1 @ Yield Rate (not Stated Rate) x Bond Face Value PLUS Step 2: PV of an Ordinary Annuity of $1 for Term @Yield x (Stated Rate x Face)

Question 355

# FAR Which costs are included in bond issuance costs? How are they recorded?

Answer 355

Include Engraving; Printing; Legal; Underwriter; Registration Debited to a deferred charge account and amortized over life of Bond using S/L Bond Proceeds - Bond Issuance Costs : Net Bond Proceeds Time of amortization begins when issued

Question 356

# FAR How are bonds reported when classified as trading securities?

Answer 356

Reported at FMV with unreleased gains and losses being included in earnings

Question 357

# FAR How are bonds amortized under the interest method?

Answer 357

Both discount and premium amortization amounts increase each year

Question 358

# FAR Describe the book value method when converting from bonds to stocks.

Answer 358

No gain or loss recognized APIC is the plug for the difference between the Bond's Book Value and the Par Value of the Common Stock

Question 359

# FAR What is the stated rate for a bond?

Answer 359

Rate on the face of the bond

Question 360

# FAR What is the market rate on a bond?

Answer 360

Rate that bonds are currently selling for

Question 361

# FAR What happens when the bond's market rate is greater than the stated rate?

Answer 361

Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value

Question 362

# FAR What happens when a bond's market rate is less than the stated rate?

Answer 362

Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value

Question 363

# FAR How does accrued interest on a bond affect the purchase price?

Answer 363

The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point). Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.

Question 364

# FAR When does interest expense start accruing on a bond?

Answer 364

When the bonds are issued

Question 365

# FAR How is an interest payment on a bond calculated?

Answer 365

Cash for payment : Stated rate x Face amount

Question 366

# FAR What amount of interest is expensed on a bond interest payment?

Answer 366

Interest expense : effective yield x carrying value Any difference between expense and cash payment is applied as amortization against premium/discount

Question 367

# FAR What are convertible bonds? Which recording method is used?

Answer 367

Bonds that can be converted to stock Book value method used if no gain or loss Market value method used if there is a gain or loss

Question 368

# FAR How is the retirement of bonds recorded?

Answer 368

Gain or Loss is Ordinary Extraordinary if both unusual and infrequent

Question 369

# FAR When is a gain recognized in a debt restructuring?

Answer 369

If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized

Question 370

# FAR What is the gain recognized under a settlement of debt?

Answer 370

Gain recognized: Difference between cash paid and carrying amount of debt Difference between non-cash asset given and re-valued at FMV and debt carrying amount

Question 371

# FAR For a creditor; how is a loan impairment recorded?

Answer 371

If future cash flows discounted at loan's Effective Interest Rate are less than Carrying Value: Effective Rate calculated using original rate; not modified rate

Question 372

# FAR When is the fair value method used for recording interest in a separate company?

Answer 372

20% Ownership or Less Accounted for as a purchase If amount paid is less than fair value; results in a gain in current period

Question 373

# FAR When is the equity method used when purchasing another company's stock? How is it recorded?

Answer 373

Ownership 21% to 50% Gives significant influence Purchase Price - Par Value : Goodwill Dividends received from the investee reduce the investment account and are not income

Question 374

# FAR When are companies required to file consolidated financials? How is it recorded?

Answer 374

Ownership of other company is greater than 50% Investment account is eliminated Only parent company prepares consolidated statements; not subsidiary. Acquired assets/liabilities are recorded at Fair Value on acquisition date. Eliminating entries for inter-company sales of inventory & PPE; also inter-company investments

Question 375

# FAR When is consolidation not required?

Answer 375

Ownership less than 50% OR Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

Question 376

# FAR What occurs under a step acquisition?

Answer 376

Acquirer held previous shares accounted for under Fair Value Method or Equity Method; and are now re-valued to Fair Value Results in a Gain or Loss in current period

Question 377

# FAR What is the difference between an acquisition and a merger?

Answer 377

Acquired companies continue to exist as a legal entity - their books are just consolidated with the parent company in the parent's financial statements Merged companies cease to exist and only the parent remains

Question 378

# FAR How are acquisition costs recorded in a merger?

Answer 378

Expensed in period incurred - i.e. NOT capitalized: Accounting; Legal; Valuation; Consulting; Professional Netted against stock proceeds: Stock registration and issuance costs

Question 379

# FAR What is a current asset?

Answer 379

Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle Includes: Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids, and short-term investments

Question 380

# FAR What is a current liability?

Answer 380

A liability expected to be paid within 12 months or less

Question 381

# FAR How is the Quick Ratio calculated?

Answer 381

(Cash + A/R + Trading Securities) / Current Liabilities

Question 382

# FAR How is the Current Ratio calculated?

Answer 382

Currents Assets / Current Liabilities

Question 383

# FAR How is Working Capital calculated?

Answer 383

Currents Assets - Current Liabilities

Question 384

# FAR How is A/R Turnover calculated?

Answer 384

Credit Sales / Average A/R

Question 385

# FAR How is Inventory Turnover calculated?

Answer 385

COGS / Average Inventory

Question 386

# FAR How is Day Sales in Inventory calculated?

Answer 386

365 / Inventory Turnover

Question 387

# FAR How is Days to Collect A/R calculated?

Answer 387

Average A/R / Average Sales per Day

Question 388

# FAR How are gain contingencies recorded?

Answer 388

They are NOT accrued due to Conservatism

Question 389

# FAR When are loss contingencies recorded?

Answer 389

If Probable - they are accrued (if estimable) and disclosed If Reasonably Possible - they are disclosed If Remote - don't accrue or disclose

Question 390

# FAR What is a temporary difference related to deferred taxes?

Answer 390

GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another Example: Dividends from a subsidiary accounted for using the Equity Method - tax income but not book income

Question 391

# FAR What is a deferred tax asset?

Answer 391

Deduction will reduce future income taxes expense.

Question 392

# FAR What is a deferred tax liability?

Answer 392

Income will be taxable in a future period and will increase future tax expense

Question 393

# FAR Which period's tax rate is used to calculate a deferred tax asset or liability?

Answer 393

The FUTURE enacted tax rate not the current one. It is never discounted to present value.

Question 394

# FAR What valuation allowance is used with respect to a deferred tax asset?

Answer 394

If it isprobable that not all of a Deferred Tax Asset (debit) will be realized then the Deferred Tax Asset account must be written down (credit) to reflect this

Question 395

# FAR What effect do permanent differences have on deferred income taxes?

Answer 395

They have no tax impact. When calculating the total differences between book and tax income subtract the permanent differences from the total before applying a future enacted tax rate

Question 396

# FAR What is deferred income tax expense?

Answer 396

The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities GAAP Method for calculating is theAsset and Liability Approach Note: IFRS uses the Liability approach only

Question 397

# FAR How are deferred tax assets classified as current or non-current on the balance sheet?

Answer 397

Current Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. All current amounts are netted and reported as a single amount on the Balance Sheet Non-Current Deferred Tax Assets and Liabilities will impact income tax expense 12 months or more fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet

Question 398

# FAR How are derivatives recorded?

Answer 398

At cost when acquired re-valued to fair value each period on Balance Sheet.

Question 399

# FAR How are unrealized gains/losses on trading securities recorded?

Answer 399

Recorded on income statement

Question 400

# FAR How are gains and losses on Available for Sale (AFS) securities recorded?

Answer 400

They are included in Other Comprehensive Income.

Question 401

# FAR What is a Fair Value Hedge? How is it recorded?

Answer 401

Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment Initially recorded on Balance Sheet at Fair Value Gains/Losses recorded on Income Statement

Question 402

# FAR What is a Cash Flow Hedge? How is it recorded?

Answer 402

Cash flow hedges protect from exposure to fluctuations in cash flows. Initially recorded on Balance Sheet at Fair Value Gains/Losses going to OCI Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.

Question 403

# FAR Where are gains and losses on foreign currency hedges recorded?

Answer 403

In Other Comprehensive Income (OCI)

Question 404

# FAR What disclosures are required for derivative transactions?

Answer 404

Objectives and Strategies Context to help investor understand the instrument Risk Management Policies Complete List of Hedged Instruments

Question 405

# FAR How do transactions denominated in in a currency other than a company's functional currency affect the income statement?

Answer 405

Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations

Question 406

# FAR What causes a Foreign Currency Transaction G/L?

Answer 406

A change in exchange rates between the functional currency and the transaction currency

Question 407

# FAR Where are Foreign Currency Transaction G/L recorded?

Answer 407

Income Statement

Question 408

# FAR Where are Foreign Currency Translation G/L recorded?

Answer 408

OCI

Question 409

# FAR If the Functional Currency equals the Local Currency - what rate is used for translating Assets and Liabilities?

Answer 409

Current Rate as of the Balance Sheet Date

Question 410

# FAR If the Functional Currency equals the Local Currency - what rate is used for translating Revenues and Expenses?

Answer 410

Weighted Average Exchange Rate for the year

Question 411

# FAR If the Functional Currency equals the Reporting Currency - what Exchangee Rate is used??

Answer 411

Use Weighted Average - Historical Exchange Rates (Inventory and Pre-paid Assets and Property Plant and Equipment) and Current Exchange Rates (Monetary Assets and Liabilities and Inventory @ Market and Trading Securities and Deferred Taxes)

Question 412

# FAR What is the primary objective of accounting?

Answer 412

To measure income

Question 413

# FAR What is the most authoritative set of accounting pronouncements?

Answer 413

The FASB Codification All pronouncements fall under the Codification umbrella

Question 414

# FAR What are the 2 Levels of Authority within the FASB codification?

Answer 414

Authoritative and Non-Authoritative

Question 415

# FAR How does managerial accounting differ from financial accounting?

Answer 415

Managerial Accounting has a timeliness focus Managerial Accounting is not required to follow GAAP

Question 416

# FAR Which financial reports are required to be filed with the SEC?

Answer 416

Form 10K - Annual and Audited Form 10Q - Quarterly and Reviewed

Question 417

# FAR What is the focus of financial reports for individual companies?

Answer 417

Focus is on the needs of users to help them make decisions and assessments about the company Does not make assessments of the economy

Question 418

# FAR What are the Primary Constraints of Financial Reporting?

Answer 418

Cost vs. Benefit Materiality

Question 419

# FAR What are the Secondary Constraints of Financial Reporting?

Answer 419

Consistency - Year vs. Year Comparability - Company vs. Company

Question 420

# FAR What are the Qualitative Characteristics of Financial Reporting?

Answer 420

Relevance & Faithful Representation Relevance - Makes a difference to the user Includes: Predictive Value - Future Trends Confirming Value - Past Predictions Materiality - Could affect User Decisions Faithful Representation Includes: Completeness - Nothing omitted that would impact the decision-making of a user Neutrality - Information is presented is without bias Free from Error - No material errors or omissions

Question 421

# FAR What are the Enhancing Qualitative Characteristics of Financial Reporting?

Answer 421

Comparability Verifiability Timeliness and Understandability Comparability - Allows users to compare different items among various periods Verifiability - Different people would reach a similar conclusion on the information presented Timeliness - Information is made available early enough to impact the decision making of users Understandability - Information is easy to understand

Question 422

# FAR How does Conservatism affect the recording of accounting transactions?

Answer 422

When an estimate is necessary due to uncertainty conservatism chooses the best option that won't overstate the financial position of the company

Question 423

# FAR What is an accrual?

Answer 423

Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet

Question 424

# FAR What is a deferral?

Answer 424

Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)

Question 425

# FAR What is recognition in accounting?

Answer 425

When an item is recorded and included in the financial statements

Question 426

# FAR Describe fair value with respect to an asset

Answer 426

The price you would receive if you sold the asset Assumes asset is at its highest and best value Assumes asset is sold at its most advantageous market to get the best price possible

Question 427

# FAR What market assumptions are made in a fair value assessment?

Answer 427

Buyer and Seller are not Related Buyer and Seller are Knowledgeable Buyer and Seller are able to transact - i.e. This isn't a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you're trying to value at $10M Buyer and Seller are both motivated to buy/sell

Question 428

# FAR What items are included in a Level 1 input in the fair value hierarchy?

Answer 428

Price quotes or market prices For example NYSE or NASDAQ

Question 429

# FAR What items are included in a Level 2 valuation input?

Answer 429

Interest rates Prime rate

Question 430

# FAR What items are included in Level 3 inputs of the fair value hierarchy?

Answer 430

Unobservable inputs such as assumptions or forecasts Lowest priority for valuation

Question 431

# FAR What are acceptable valuation techniques for fair value?

Answer 431

Market approach - uses market transactions and prices to value the asset Income approach - uses present value discounts earnings Cost approach - uses replacement cost to value the asset

Question 432

# FAR What are current assets?

Answer 432

Cash Inventory or Assets expected to be converted or consumed during a business' operating cycle Deferred Gross Profit on Installment Sales (Contra Asset) Receivables expected to be collected in 12 months or less

Question 433

# FAR What are current liabilities?

Answer 433

Liabilities that will use current assets during the present operating cycle

Question 434

# FAR What is an accrued liability?

Answer 434

Expense that has been incurred but not paid Example: rents payable

Question 435

# FAR What is a deferred revenue?

Answer 435

A type of current liability Payments that have been received but cannot be recorded as revenue yet Example: Tenant pre-pays rent - Landlord still must perform to earn it and is a liability until this happens

Question 436

# FAR When are revenues recognized?

Answer 436

When they have been earned; i.e. company has performed

Question 437

# FAR What is a gain?

Answer 437

Increase in equity from an activity or event that is not central to the main activities of the business Can be operating or non-operating

Question 438

# FAR What is a loss?

Answer 438

Decrease in equity from an activity or event that is not central to the main activities of the business Can be operating or non-operating

Question 439

# FAR What is an operating cycle?

Answer 439

Average time it takes to turn materials or services into Cash

Question 440

# FAR What is the present value of future cash flows?

Answer 440

Valuation method - the current value of a future amount of money using a specific interest rate

Question 441

# FAR What is historical cost?

Answer 441

How much an asset cost - (net of depreciation and amortization)

Question 442

# FAR What is replacement cost?

Answer 442

How much it would cost to reacquire an asset today (Entrance Cost)

Question 443

# FAR What is a market cost?

Answer 443

The sale price of an asset (Exit Cost)

Question 444

# FAR What is Net Realizable Value?

Answer 444

Sale Price of an Asset - Selling/Disposal Fee

Question 445

# FAR When is royalty income recognized? How is it recognized?

Answer 445

Recognized when earned If the royalty % is applied against net sales then subtract the estimated return amount from the gross sales first and then apply the royalty rate

Question 446

# FAR When is revenue recognized in an installment sale?

Answer 446

Revenue recognized upon receipt of cash Only used when cash collection is uncertain

Question 447

# FAR What is deferred gross profit?

Answer 447

Gross Profit that can't be recognized until cash is received D.GP : Gross Profit % x Accounts Receivable Pay attention to the year if GP% varies

Question 448

# FAR What is the cost recovery method?

Answer 448

No revenue recognized until all costs are recovered from purchase of the asset Most conservative method of revenue recognition when collection of sale price is uncertain

Question 449

# FAR What is subscription revenue? How is it recorded?

Answer 449

Payment has been received but performance is not complete. As company performs revenue is recognized. Recorded as a Deferred Revenue (Liability) on Balance Sheet

Question 450

# FAR How are franchise revenues recorded?

Answer 450

Franchisor - Startup franchise fee revenue deferred until substantial performance Franchisee - Costs are deferred until corresponding revenue is recognized

Question 451

# FAR How do you calculate sales revenue starting from cash basis income?

Answer 451

Mnemonic: SPEAR-BAR Sales (i.e. Customer Payments) + Ending Accounts Receivable - Beginning Accounts Receivable : Sales Revenue on an Accrual Basis

Question 452

# FAR How do you calculate COGS starting from Cash Basis?

Answer 452

Mnemonic: CRAP-I Cash Remitted (i.e. paid) +Increase in Accounts Payable -Increase in Inventory :COGS on an Accrual Basis

Question 453

# FAR How are discontinued operations reported? When are they used?

Answer 453

Reported Net of Tax after Continuing Operations but before Extraordinary Items Company decides to cease operating a segment of its business (represents a strategic shift and has major effect on operations and financials) Includes Income (or loss) from the period plus the gain (or loss) from disposal

Question 454

# FAR For discontinued operations, what are the three requirements for disposal assets?

Answer 454

They must be Held for Sale - Sold - or Disposed of another way

Question 455

# FAR What qualifies as an extraordinary item? How is it recorded?

Answer 455

Both unusual AND infrequent Reported Net of Tax after Discontinued Operations Note: Usual *or* Infrequent Items are reported as part of Continuing Operations

Question 456

# FAR What is constant dollar accounting?

Answer 456

Adjusts assets to reflect a consistent level of purchasing power due to inflation Uses the Consumer Price Index (CPI)

Question 457

# FAR When are expenses recognized?

Answer 457

When they are incurred. Accrue if not yet paid.

Question 458

# FAR What are accrued expenses?

Answer 458

Those incurred but not paid. Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale) Period costs - Expenses amortized and recognized with the passage of time

Question 459

# FAR When should impaired assets be written down to fair value and expensed?

Answer 459

Immediately.

Question 460

# FAR What major items should be classified under General & Administrative (G&A) expenses?

Answer 460

Office staff salaries Office/building rent Office supplies Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense not G&A

Question 461

# FAR What are business start-up costs?

Answer 461

One-time costs for opening a new business Expensed as they are incurred

Question 462

# FAR When is interest *not* expensed?

Answer 462

Interest on projects (software) for internal use is not expensed but is instead capitalized

Question 463

# FAR What are the major components of Comprehensive Income?

Answer 463

Net Income + Other Comprehensive Income (OCI): Revenues/Expenses Gains/Losses Cumulative accounting adjustments Reclassifications adjustments Non-owner changes in equity

Question 464

# FAR What items are considered cumulative accounting adjustments?

Answer 464

Foreign Currency Translation Adjustments Unrealized gains on AFS Securities Minimum Pension Liability adjustment for defined benefit plans

Question 465

# FAR What is the purpose of a reclassification adjustment?

Answer 465

Avoids double counting items that were included in both Net Income and OCI Example: AFS Securities previously included in OCI are now sold at a loss and reported on the Income Statement

Question 466

# FAR Where is Comprehensive Income reported?

Answer 466

Reported in a Single or Combined Income Statement

Question 467

# FAR What disclosures on accounting policies are required in financial statements?

Answer 467

Accounting Principles used Basis of Consolidation Inventory Pricing Methods Depreciation Method Amortization of Intangibles

Question 468

# FAR What are some major risks and uncertainties that must be disclosed?

Answer 468

Nature of Operations Use of Estimates and listing of Significant Estimates Concentration vulnerability

Question 469

# FAR Under Cash Basis Accounting how are Revenue and Expenses recognized?

Answer 469

Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow

Question 470

# FAR Is Cash Basis Accounting ok for Tax Returns?

Answer 470

Yes

Question 471

# FAR Is Cash Basis Accounting GAAP?

Answer 471

No - GAAP uses Accrual Accounting

Question 472

# FAR What is an advantage of Modified Cash Basis Accounting?

Answer 472

It avoids the complexities of GAAP but provides more information that Cash Basis Accounting

Question 473

# FAR Is Modified Cash Basis GAAP?

Answer 473

No - GAAP uses Accrual Accounting

Question 474

# FAR What are the 3 acceptable options for Income Tax Basis Accounting

Answer 474

Cash Basis - Accrual Basis - Hybrid Method

Question 475

# FAR What are the advantages of the Small and Medium Sized Entity Framework?

Answer 475

It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)

Question 476

# FAR What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?

Answer 476

Deferred Taxes Method and Taxes Payable Method

Question 477

# FAR What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?

Answer 477

Expensed or Amortized (15 years)

Question 478

# FAR How is Goodwill treated under the Small and Medium Sized Entity Framework?

Answer 478

Amortized (15 years)

Question 479

# FAR How are Research and Development costs recorded?

Answer 479

They are expensed in the period incurred and are not capitalized.

Question 480

# FAR Which expenditures are included in the cost of a building?

Answer 480

All expenditures to get the building into working condition are ready for use

Question 481

# FAR Which expenditures are included in the cost of land?

Answer 481

All expenditures to get the land ready for its intended use: Title & County Fees Clearing of Land - Dirt work etc. Demolition and removal of old buildings (minus any scrap or salvage) Note: capitalized land costs are not depreciated

Question 482

# FAR In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?

Answer 482

If the cash flows from the assets exchanged are not significantly different no gain or loss is recognized on a non-monetary exchange as it lacks commercial substance. The new asset is recorded at the book value of the asset given up. The only gain that can be recognized is any boot (cash) received.

Question 483

# FAR In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

Answer 483

If resulting cash flows are significantly different then the transaction has commercial substance and a gain/loss is recorded on the exchange. The new asset is recorded at the FAIR VALUE of the assets given up unless the asset acquired has a fair value that is easier to determine.

Question 484

# FAR How is donated property recorded by the donee?

Answer 484

Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value

Question 485

# FAR How is donation of property recorded by the donor?

Answer 485

Recorded at Fair Value of asset given up. Gain or Loss is recorded.

Question 486

# FAR How is double-declining balance (DDB) depreciation calculated?

Answer 486

(1 / Useful Life) x 2 x Book Value Ignore salvage value.

Question 487

# FAR How is Sum of Year's Digits (SYD) depreciation calculated?

Answer 487

(Cost - Salvage Value) x (Remaining Useful Life / SYD) : Depreciation expense For example the depreciation factor for the third year of a 10-year asset would be: : 8 / (10+9+8+7+6+5+4+3+2+1) : 8/55 : 14.5% Remaining useful life : 8 SYD : 55

Question 488

# FAR How is straight line depreciation calculated?

Answer 488

(Cost - Salvage Value) / Useful life : depreciation expense

Question 489

# FAR When is an asset considered to be impaired? How is impairment loss calculated?

Answer 489

When the un-discounted future cash flows are less than the carrying value of the asset. Carrying Value - Fair Value : Impairment Loss Note: impaired assets that recover their value can't be written back up once written down

Question 490

# FAR How are legal fees to defend a patent amortized?

Answer 490

If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent's economic life. If unsuccessful they are expensed immediately.

Question 491

# FAR What are the two steps for testing goodwill impairment?

Answer 491

Compare the CV to the FV. If FV is greater than CV no impairment exists you're done. If impairment appears to exist the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.

Question 492

# FAR How are costs for developing software recorded?

Answer 492

Expenses prior to technological feasibility are expensed as R&D. After technological feasibility but prior to production costs are capitalized. Expenses incurred during production are charged to inventory. Expenses incurred training on internal use software are expensed.

Question 493

# FAR What expenditures are included in the cost of equipment?

Answer 493

All expenditures to get the asset into working condition and ready for use: ``` Purchase price + liabilities assumed Shipping Taxes Insurance Installation Testing Legal fees Construction loan interest ``` Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.

Question 494

# FAR What are the three major types of funds in governmental accounting?

Answer 494

Governmental, Proprietary, Fiduciary

Question 495

# FAR Which two accounting bases are used in governmental accounting?

Answer 495

Accrual basis - current economic resources focus (revenues recognized when earned) Modified accrual basis - current financial resources focus (revenues recognized when available and measurable)

Question 496

# FAR What is a budget appropriation?

Answer 496

The highest amount allowed for a particular expenditure under a budget.

Question 497

# FAR What is an encumbrance?

Answer 497

Records purchase and reserves it for the encumbrance.

Question 498

# FAR What is the opening budgetary entry?

Answer 498

Dr Estimated Revenues Control Cr Appropriations Control Dr/Cr Budgetary Fund Balance (plug)

Question 499

# FAR What is the closing budgetary entry?

Answer 499

Dr Appropriations Control Dr/Cr Budgetary Fund Balance (plug) Cr Estimated Revenues Control

Question 500

# FAR What are the types of governmental funds?

Answer 500

``` General Fund Special Revenue Fund Permanent Fund Capital Projects Fund Debt Service Fund ```

Question 501

# FAR What is a General Fund?

Answer 501

The operating fund of the governmental unit Records Significant Revenues: Taxes; Tickets; Fines; Licenses Records Significant Expenditures: Police; Education; Fire Dept

Question 502

# FAR What is a Special Revenue Fund?

Answer 502

Restricted for a specific purpose such as street repair.

Question 503

# FAR What is a Permanent Fund?

Answer 503

Legally restricted fund; where only earnings can be used to fund programs. Principal remains intact.

Question 504

# FAR What is a Capital Projects Fund?

Answer 504

Used to acquire and build facilities.

Question 505

# FAR What is a Debt Service Fund?

Answer 505

Handles repayment of long-term debt and related interest.

Question 506

# FAR Which fund statements are issued in Governmental Accounting?

Answer 506

Balance Sheet Statement of Revenues; Expenditures; and Changes in Fund Balance

Question 507

# FAR When is Revenue recorded in Governmental Accounting?

Answer 507

When it is BOTH available and measurable; regardless of when it is spent.

Question 508

# FAR What is Derived Tax Revenue?

Answer 508

Money collected from people doing things: Sales tax (buying cars) or income tax (people working)

Question 509

# FAR What is Imposed Tax Revenue?

Answer 509

Tax assessed just because things exist Example: property tax on a car (even if it's never driven); real estate tax Recorded as a revenue when BUDGETED. Estimated uncollectible property tax revenues don't offset revenues; so don't net them.

Question 510

# FAR What are the types of Proprietary Funds?

Answer 510

Internal Service Funds - to serve the needs of other governmental units (i.e. motor pool) Enterprise Funds - provide goods or services to external users (i.e. post office)

Question 511

# FAR What are the Fund Balance Types?

Answer 511

``` Restricted - Restricted by Contributor Committed - Restricted by Government Assigned - Intended for a purpose Unassigned - Available to be spent Non-spendable - Not in a spendable state ```

Question 512

# FAR What are the types of Fiduciary Funds?

Answer 512

Agency Fund - government acts as an agent or custodian Pension Trust Fund - Government is a trustee for a pension plan Investment Trust Fund - Government is a trustee over a series of investments Private Purpose Trust - Trust that benefits various individuals and entities

Question 513

# FAR How are Assets & Liabilities presented on the Statement of Net Position?

Answer 513

Assets (Current & Non-Current) Deferred Outflows of Resources Liabilities (Current & Non-Current) Deferred Inflows of Resources

Question 514

# FAR How are Capital Assets shown on a governmental Statement of Net Assets?

Answer 514

They are shown net of debt Asset Cost - Accumulated Depreciation - Asset Liabilities : Net Assets

Question 515

# FAR How is infrastructure reported on a governmental Statement of Net Assets?

Answer 515

Modified approach: Reported at cost; no accumulated depreciation

Question 516

# FAR How is a Statement of Net Assets divided?

Answer 516

Into Governmental Activities and Business Activities

Question 517

# FAR How are activities presented in a Statement of Activities?

Answer 517

They are divided by function If the activities of a component are distinguishable from the rest of the governmental entity; then discreet presentation is required If the activities of the component cannot be identified and separated from the rest of the governmental activities; then blended presentation is warranted. Component units are reported in the Entity-Wide Financial Statements and not the Fund Financial Statements.

Question 518

# FAR What is the primary objective of governmental accounting?

Answer 518

To provide information that is useful and benefits a wide range of users including: Costs of services provided Sufficiency of revenues to cover costs Financial position of entity

Question 519

# FAR What Financial Statements are required for Defined Benefit Pension plans?

Answer 519

Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position

Question 520

# FAR What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?

Answer 520

Assets; Deferred Outfows; Liabilities; Deferred Outflows; Fiduciary Net Position

Question 521

# FAR What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?

Answer 521

Additions (Contributions and Net Investment Income) - Deductions (Benefits Payments and Admin Expense) : Net Change in Fiduciary Net Position

Question 522

# FAR What should be included in the Financial Statement notes for Defined Benefit Pension Plans?

Answer 522

Types of Benefits; Plan Member Classes; Board Information; Investment Policies and FV Determination

Question 523

# FAR Which organization's standards are the most authoritative in the hierarchy of international accounting?

Answer 523

The International Accounting Standards Board (IASB)

Question 524

# FAR Where is the first place management should look for guidance on international recognition and accounting policies?

Answer 524

The International Financial Reporting Standards (IFRS) issued by the IASB

Question 525

# FAR Which framework helps to develop standards for international accounting?

Answer 525

The IASB Framework * The framework is NOT a standard itself * The framework does not supersede any standard's authority

Question 526

# FAR What is the objective of the IFRS framework?

Answer 526

To provide users with information on international accounting.

Question 527

# FAR Which assumptions are followed within the IRFS framework?

Answer 527

Entity is a Going Concern | Entity uses the accrual basis of accounting.

Question 528

# FAR What are the Qualitative Characteristics of accounting information within IFRS?

Answer 528

Relevance & Faithful Representation Relevance - Makes a difference to the user Includes: Predictive Value - Future Trends Confirming Value - Past Predictions Faithful Representation Includes: Completeness - Nothing omitted that would impact the decision-making of a user Neutrality - Information is presented is without bias Free from Error - No material errors or omissions

Question 529

# FAR What are the Enhancing Characteristics of IFRS?

Answer 529

Comparability - Allows users to compare different items among various periods Verifiability - Different people would reach a similar conclusion on the information presented Timeliness - Information is made available early enough to impact the decision making of users Understandability - Information is easy to understand

Question 530

# FAR How does comparability differ under GAAP versus IFRS?

Answer 530

Comparative information from prior year is required under IFRS. GAAP requires that if multiple years are presented they are consistently prepared however it doesn't require prior year comparative statements.

Question 531

# FAR What is the Pervasive Constraint within IFRS?

Answer 531

Cost vs. Benefit

Question 532

# FAR Which items are considered reporting elements under IFRS?

Answer 532

``` Asset Liability Equity Income Expense ```

Question 533

# FAR What are the criteria for recognition on IFRS financial statements?

Answer 533

Probable future economic benefit Can be measured reliably If the value or outcome cannot be measured reliably IFRS requires the use of the Cost Recovery Method.

Question 534

# FAR When transitioning to IFRS what type of financial statement must be produced for the first reporting period?

Answer 534

A full comparative statement using IFRS.

Question 535

# FAR If IFRS was implemented in June 2012 for use in the December 31 2012 financial statements what is the Date of Transition?

Answer 535

January 1 2011 because a full year of comparative statements is required from the previous year

Question 536

# FAR For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?

Answer 536

The Fair Value election

Question 537

# FAR Where on the financial statements are adjustments for adopting to IFRS made?

Answer 537

In the entity's retained earnings or equity

Question 538

# FAR How is going concern different under IFRS than from GAAP?

Answer 538

Going Concern is an assumption under IFRS

Question 539

# FAR How are extraordinary items treated under IFRS?

Answer 539

IFRS doesn't allow extraordinary items.

Question 540

# FAR How is the completed contract method used under IFRS?

Answer 540

Completed contract method is not allowed under IFRS.

Question 541

# FAR How is LIFO treated under IFRS?

Answer 541

IFRS does not allow LIFO.

Question 542

# FAR Which financial statements are required under IFRS?

Answer 542

Statement of Comprehensive Income Statement of Changes in Equity

Question 543

# FAR How is the term income used in IFRS?

Answer 543

Income is used instead of revenue and encompasses BOTH revenue and gains.

Question 544

# FAR How is the term profit used in IFRS?

Answer 544

In IFRS the term profit is used instead of Net Income.

Question 545

# FAR How does IFRS treat gains?

Answer 545

They are treated the same as revenue and are not separated on the financial statements.

Question 546

# FAR How does IFRS treat losses?

Answer 546

In IFRS losses are treated the same as expenses but they ARE separated on the financial statements.

Question 547

# FAR How does refinancing of current liabilities to long-term liabilities under IFRS differ from GAAP?

Answer 547

Under IFRS current liabilities can only be refinanced into a non-current liability if the refinance agreement is EXECUTED prior to the balance sheet date. GAAP requires only *intent* to refinance not actual execution.

Question 548

# FAR How do contingent liabilities differ between GAAP and IFRS?

Answer 548

Under GAAP there are three classifications of contingent liabilities - Probable Reasonably Possible and Remote. Under IFRS contingencies are uncertain future events and are classified as a provision if probable and measurable even if uncertain in timing or amount.

Question 549

# FAR How are bonds recorded under IFRS?

Answer 549

Bonds may be recorded on the Statement of Financial Position using one of two methods Fair Value through profit or loss * Liability revalued at the end of each period * Gain or Loss recognized in period Amortized Cost *Using Effective Interest Method

Question 550

# FAR How are deferred taxes treated under IFRS?

Answer 550

They use the liability method - all deferred tax liabilities must be reported but only probable deferred tax assets can be reported. They are non-current on the statement of financial position.

Question 551

# FAR When can deferred tax assets and liabilities be netted under IFRS?

Answer 551

ONLY if they are related to the same country/taxing authority For example China Deferred Tax Assets can't offset Japan Deferred Tax Liabilities

Question 552

# FAR Which tax rates are used for calculating deferred tax assets/liabilities under IFRS?

Answer 552

The enacted rate or substantially enacted tax rate. | GAAP is the enacted tax rate only

Question 553

# FAR Which items are recorded on the Income Statement in IFRS?

Answer 553

``` Income Finance Costs Tax Expense Discontinued Ops Profit/Loss Non-controlling interest in Profit/Loss Net profit/loss attributable from equity ```

Question 554

# FAR How are property plant and equipment (PP&E) recorded and valued under IFRS?

Answer 554

Recorded at cost Valued using either: Cost model - asset carried at cost less accumulated depreciation and impairment loss Revaluation model - asset adjusted to fair value less accumulated depreciation

Question 555

# FAR What are the requirements for using the revaluation model for PP&E under IFRS?

Answer 555

Asset must be able to be reliably measured Must be applied to whole class of assets not just one asset No guidance on how often assets should be revalued under IFRS

Question 556

# FAR How is investment property reported under IFRS?

Answer 556

Initially recorded at cost Revalued using either Fair Value model or Cost model

Question 557

# FAR How is profit or loss recorded in the current period for investment property under the Fair Value model of IFRS?

Answer 557

Recorded on the Income Statement Investment P/L : IS PP&E P/L : OCI

Question 558

# FAR Under IFRS how is investment property reported under the Cost Model?

Answer 558

Carried at Cost minus Accumulated Depreciation Fair Value must still be disclosed in the notes to the financial statements

Question 559

# FAR How are leases reported under IFRS?

Answer 559

Operating Leases can be recorded as Investment Property if measured at Fair Value All other investment property must use Fair Value Model if one asset uses it

Question 560

# FAR How are intangible assets valued under IFRS?

Answer 560

Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss) or the Revaluation Model (Fair Value less Accumulated Depreciation)

Question 561

# FAR How is internally generated goodwill reported under IFRS?

Answer 561

It is not recognized.

Question 562

# FAR How is amortization of intangibles handled under IFRS?

Answer 562

If asset has a finite life it is amortized over useful life. If asset has indefinite life it is not amortized but is tested for impairment at the reporting date.

Question 563

# FAR When must a lease be recorded as a Finance Lease under IFRS?

Answer 563

If the substantial risks of ownership have passed to the Lessee then the Lease must be accounted for as a Finance Lease

Question 564

# FAR How are defined benefit plans recorded under IFRS?

Answer 564

Project-unit-credit method calculates the PV of the defined benefit obligation

Question 565

# FAR How are interest expense and/or finance costs classified on an IFRS statement of cash flows?

Answer 565

They can be classified as either Operating or Financing Once a classification is chosen all future costs must be classified there

Question 566

# FAR How are significant non-cash transactions recorded on an IFRS statement of cash flows?

Answer 566

They must be included in the notes to the financial statements.

Question 567

# FAR Which costs are inventoriable?

Answer 567

Purchases - Net of Discounts, Freight, Warehouse expenditures

Question 568

# FAR When does ownership of goods transfer when shipped FOB Shipping Point?

Answer 568

FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock

Question 569

# FAR When does ownership transfer when goods are sent FOB Destination?

Answer 569

FOB Destination keeps the items in the seller's inventory until it reaches the buyer

Question 570

# FAR Which costs are non-inventoriable?

Answer 570

Sales Commissions Interest on liabilities to vendors Shipping expense to customers

Question 571

# FAR When are discounts recorded under the gross method?

Answer 571

Under the gross method, discounts are recorded only when used.

Question 572

# FAR Under the net method, when are discounts recorded?

Answer 572

Under the net method, discounts are recorded whether used or not. Unused discounts are allocated to financing expense.

Question 573

# FAR How is gross margin calculated?

Answer 573

Gross Margin : Sales - COGS (BI + P - EI)

Question 574

# FAR Describe the periodic inventory system.

Answer 574

Inventory is counted at certain times throughout the period Weighted-average cost flow method is used.

Question 575

# FAR Describe the perpetual inventory system.

Answer 575

Inventory count continually updated Uses a moving-average cost flow method

Question 576

# FAR In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

Answer 576

Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.

Question 577

# FAR How is inventory turnover calculated?

Answer 577

COGS / Average Inventory

Question 578

# FAR How is Average Day's Sales in inventory calculated?

Answer 578

365 / Inventory Turnover

Question 579

# FAR Under a consignment system, who holds the consigned goods in inventory?

Answer 579

The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.

Question 580

# FAR Under a consignment system, does the consignee hold consignment inventory in their own inventory?

Answer 580

No. Consignment goods are maintained in the inventory of the consignor, not the consignee.

Question 581

# FAR What effect does overstatement or understatement of inventory have on ending retained earnings?

Answer 581

Misstatement of beginning inventory does NOT have an effect on ending retained earnings. Misstatement of ENDING inventory does have an effect on retained earnings.

Question 582

# FAR How does misstatement of ending inventory effect Ending Retained Earnings?

Answer 582

EI Over : COGS Under : ERE Over EI Under : COGS Over : ERE Under

Question 583

# FAR Which costs are included in COGS first under the FIFO (first in first out) system?

Answer 583

The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1 This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes

Question 584

# FAR Which costs are included in COGS under the LIFO (last in first out) system?

Answer 584

The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50

Question 585

# FAR How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

Answer 585

COGAS / Total Units : Weighted Average Cost Per Unit

Question 586

# FAR How does FIFO's COGS relate to LIFO's in a time of changing prices?

Answer 586

FIFO's relationship to COGS will be opposite LIFO's relationship to COGS in periods of falling/rising prices.

Question 587

# FAR How do FIFO and LIFO change in a period of rising prices?

Answer 587

FIFO has the Lowest COGS FIFO is a cat that sees a mouse starts Low and is Rising If COGS is Low, that means EI is High

Question 588

# FAR How do FIFO and LIFO change in a period of falling prices?

Answer 588

FIFO has the Highest COGS Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch If COGS is High, that means EI is Low

Question 589

# FAR Under a Lower of Cost or Market, how are the benchmarks calculated?

Answer 589

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs Market : Replacement Cost Market Floor : Net Realizable Value - Normal Profit

Question 590

# FAR How are Available-For-Sale securities recorded on the Balance Sheet?

Answer 590

At Fair value as either Current or Non-current assets.

Question 591

# FAR How are Available-For-Sale security Unrealized G/L treated?

Answer 591

Included in OCI (Other Comprehensive Income)

Question 592

# FAR How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?

Answer 592

HTM - Stockholder's Equity / Trading Securities - Current Period.

Question 593

# FAR How are Held-to-Maturity securities recorded on the Balance Sheet?

Answer 593

Amortized cost as Current or Non-current assets. If reclassified as AFS - Unrealized G/L go to Stockholder's Equity If reclassified as Trading Securities - Unrealized G/L recognized in Current Period

Question 594

# FAR How are Held-to-Maturity securities Unrealized G/L treated?

Answer 594

Trick question - Unrealized gains or losses are not applicable because they are HTM

Question 595

# FAR How are Trading Securities recorded on the Balance Sheet?

Answer 595

At Fair Value as a Current Asset Unrealized gains/losses are recorded on the Income Statement If they are reclassified as held-to-maturity or available-for-sale- there is no effect upon transfer.

Question 596

# FAR How are Trading Securities Unrealized G/L treated?

Answer 596

Recorded on the Income Statement If they are reclassified as HTM or AFS - there is no effect upon transfer.

Question 597

# FAR How is a Capital Lease recorded?

Answer 597

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

Question 598

# FAR What footnote disclosures are required for a Capital Lease?

Answer 598

Future minimum rental commitments By year - for 5 years All remaining years as a group

Question 599

# FAR What are the requirements for a Capital Lease for a lessor?

Answer 599

Same as for lessee (Title- BPO or Substance)- PLUS: Collectability of lease payments is predictable No uncertainties about the lessor reimbursing the lessee for costs incurred

Question 600

# FAR What are the characteristics of an Operating Lease for a lessee?

Answer 600

Risk of ownership does NOT pass No asset or liability is recorded on the financial statements Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement's life.

Question 601

# FAR What are the characteristics of an Operating Lease for a LESSOR?

Answer 601

Rent revenue recorded Leased property remains an asset and depreciated by lessor If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis

Question 602

# FAR What are the characteristics of a Direct Financing Lease?

Answer 602

Interest Revenue (or expense for lessor) decreases with passage of time Principal amount increases with each payment Carrying amount of Lease decreases

Question 603

# FAR How is a sale-leaseback recorded?

Answer 603

Any profit on the sale is deferred and amortized Exception: If PV of lease payments is 10% or less of the asset's FMV- the gain is recognized If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments

Question 604

# FAR What are the characteristics of lease payments under an annuity due situation?

Answer 604

Payments begin at the start of the lease period Think: Rent/Mortgage payments are Due at the first of the month

Question 605

# FAR What are the characteristics of lease payments under an ordinary annuity situation?

Answer 605

Payments begin after the end of the first year Think: An annuity that pays you at the end of each year

Question 606

# FAR What are the characteristics of a Capital Lease for a lessee?

Answer 606

Risk of ownership passes to lessee by: Title, Bargain Purchase Option (BPO), Substance - Lease is more than 75% of asset's useful life or PV of minimum lease payments are more than 90% of fair value

Question 607

# FAR Which financial statements are required for not - for - profit organizations?

Answer 607

Statement of Financial Position Statement of Activities Statement of Cash Flows Statement of Functional Expense (Volunteer Health Organizations Only)

Question 608

# FAR What are the major classifications found on a Statement of Financial Position?

Answer 608

Similar to Balance Sheet: Assets Liabilities Net Assets Unrestricted Assets Permanently Restricted Assets Temporarily Restricted Assets

Question 609

# FAR What are the major classifications in a Statement of Activities?

Answer 609

Similar to an Income Statement - organization - wide: Revenues Expenses - ONLY deducted from Unrestricted Revenues Gains and Losses Changes in Net Asset classes Unrestricted Permanently Restricted Temporarily Restricted

Question 610

# FAR What are the characteristics of a Statement of Cash Flows for not - for - profits? What are the major classifications?

Answer 610

Both direct and indirect methods are OK Operating Activities - Unrestricted Revenues and Unrestricted Expenses Investing Activities Financing Activities - Endowments and restricted contributions

Question 611

# FAR Which organizations are required to present a Statement of Functional Expenses?

Answer 611

Volunteer Health Organizations

Question 612

# FAR Which statements are required for non - governmental hospitals?

Answer 612

Balance Sheet Statement of Operations Statement of Changes in Net Assets Statement of Cash Flows Financial Statement Notes

Question 613

# FAR Which basis of accounting is used for revenues and net assets?

Answer 613

Accrual basis of accounting is used Only external parties can restrict the use of assets (permanent or temporary) Assets earmarked internally by management are still classified as unrestricted

Question 614

# FAR What are the characteristics of unrestricted assets or revenue?

Answer 614

No restrictions or conditions placed on entity in order to use the resources Note: assets earmarked internally by management are still unrestricted

Question 615

# FAR When are revenues on contributions recognized?

Answer 615

Revenues on contributions are recognized in the year received - not the year the contribution is spent and are recorded at Fair Value on the date received

Question 616

# FAR When are services rendered considered contributions?

Answer 616

If the organization would have otherwise paid for them or They increase the value of a non - monetary asset

Question 617

# FAR Is hospital charity care revenue?

Answer 617

NO. It is disclosed in the notes to the financial statements only.

Question 618

# FAR How are unconditional pledges to contribute recorded?

Answer 618

Classified as revenue in the current year only - multi - year future contributions fall under Temporarily Restricted.

Question 619

# FAR Which revenues are expenses deducted from?

Answer 619

Expenses ONLY deducted from Unrestricted Revenues - not Temporary or Permanently Restricted Revenues/Assets

Question 620

# FAR What are the characteristics of temporarily restricted assets/revenue?

Answer 620

Use is restricted to a future time - which could then convert to unrestricted - Class: Temp. Restricted Revenue Unrestricted contributions promised (including multi - year contributions) - but not yet received are actually restricted by time and are therefore classified as Temporarily Restricted Assets - Multi - year contributions are recorded at the present value of the future contributions

Question 621

# FAR What are the characteristics of an endowment?

Answer 621

Use of investment is restricted - but income from investment could be either restricted or unrestricted Must be under control of receiving entity (Quasi Endowment) in order to be recorded in unrestricted net assets Otherwise - a memo entry is recorded

Question 622

# FAR When is the donation of an art collection recognized as a contribution or asset?

Answer 622

Not recognized as assets or contribution revenue if they are held of display or education' or their sale results in the purchase of similar items

Question 623

# FAR When both Temporarily Restricted Assets and Unrestricted Assets are available for use - which assets are used first?

Answer 623

Temporarily restricted assets are used before Unrestricted assets.

Question 624

# FAR How is a refundable advance recorded by a not for profit?

Answer 624

Classified as a Liability Promise to contribute assets pending on certain conditions being met Becomes unconditional once the possibility that it won't happen is remote

Question 625

# FAR How are investments recorded and valued in not - for - profit accounting?

Answer 625

Fair Value is mostly used Exception - Equity method used when significant influence exists

Question 626

# FAR How are scholarships recorded?

Answer 626

As a reduction of revenue - netted against college's tuition

Question 627

# FAR How is depreciation expense recorded by a not - for - profit?

Answer 627

Depreciation expense is allocated proportionately to various functions

Question 628

# FAR How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

Answer 628

Calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability

Question 629

# FAR If no goodwill is recorded upon admission of a new partner - which method is used for recording the new partner's interest?

Answer 629

The bonus method: Old Partnership Equity + New Partner Contribution : New Partnership Equity x New Partner % : New Partner Equity Amount New Partner Contribution - New Partner Equity Amount : Bonus to Prior Partners using same allocation as P/L

Question 630

# FAR If goodwill is recorded upon admission of a new partner - how is the partner's interest recorded?

Answer 630

Using the goodwill method: New Contribution / New Equity % : Partnership Value Implied Value of Partnership - Capital Accounts of all partners : Goodwill to Old Partners Under the Goodwill Method - the new Partner is paying an amount for a certain percentage stake in the partnership. For instance if they pay $1000 for a 25% stake - then it is assumed that the Partnership is worth $4 -000 ($1 -000/25%)

Question 631

# FAR At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?

Answer 631

Fair Value for assets contributed. Present value of remaining cash flows for liabilities assumed.

Question 632

# FAR Which Personal Financial Statements are required?

Answer 632

Required: Statement of Financial Condition (Statement of Changes in Net Worth is optional)

Question 633

# FAR How are assets and liabilities valued in a Personal Financial Statement?

Answer 633

Estimated current value

Question 634

# FAR How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a Personal Financial Statement?

Answer 634

Presented on Statement of Financial Condition between Liabilities and Net Worth

Question 635

# FAR What is the general presentation on a statement of financial condition?

Answer 635

Assets - Liabilities - Estimated taxes on assets sold : Net Worth

Question 636

# FAR How is life insurance presented on a Personal Financial Statement?

Answer 636

Only shown if there is cash surrender value It is shown net of loans against the policy

Question 637

# FAR How are business interests shown on a Personal Financial Statement?

Answer 637

Business Interests that constitute a large percentage of total assets should be separated from other investments

Question 638

# FAR What is the discreet view in an Interim Financial Statement?

Answer 638

Interim period is a separate accounting period - not GAAP Same accounting principles used for annual reporting should be used.

Question 639

# FAR What is the integral view in an Interim Financial Statement?

Answer 639

Interim period is a part of the annual period - GAAP Gross profit method may be used to estimate COGS and inventory Temporary declines in inventory aren't recognized

Question 640

# FAR How are discontinued operations & extraordinary items reported in Interim Financial Statements?

Answer 640

Aren't prorated Fully recognized in Interim Period as incurred If it occurs in Q3 - it's recognized in Q3

Question 641

# FAR How are cumulative gains and losses reported in Interim Financials?

Answer 641

Reported as if they occurred in the first quarter

Question 642

# FAR How is inventory valuation handled in Interim Financials?

Answer 642

If inventory experiences a decline in value during an interim period - the loss is recognized in the interim period If the loss is expected to be only temporary - no loss is recognized

Question 643

# FAR What is one of the primary problems with interim reporting?

Answer 643

The matching principle gets messed up - Expenses incurred in one period may benefit future periods

Question 644

# FAR For whom is Segment Reporting required?

Answer 644

Publicly traded companies

Question 645

# FAR What factors cause a segment to be significant and therefore to be reported separately?

Answer 645

Revenue of segment is 10% or more of total Profit is 10% or more of total Segment assets are 10% or more of total 75% Test - All segment revenues must equal 75% of total external revenues

Question 646

# FAR What is the disclosure requirement regarding sales of 10% or more for one customer?

Answer 646

If 10% or more of enterprise revenue comes from one customer - the segment making the sales must be disclosed

Question 647

# FAR What items are included in operating activities on the Statement of Cash Flows?

Answer 647

Cash received from Customers- Interest & Dividends- Trading Securities Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities

Question 648

# FAR What items are included in investing activities on a Statement of Cash Flows?

Answer 648

Cash received: Sale of PP&E- Sale of Investments- Loan Principle Cash paid: Loans- Acquisitions- AFS or HTM Securities- Taxes- Trading Securities

Question 649

# FAR What items are included in Financing Activities in a Statement of Cash Flows?

Answer 649

Cash received: Issuance of Stock- Issuance of Debt Cash paid: Dividends

Question 650

# FAR What is the direct method for a Statement of Cash Flows?

Answer 650

Starts with Income from Continuing Operations Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses If used- the Indirect Method must also be shown

Question 651

# FAR What is the Indirect Method for a Statement of Cash Flows?

Answer 651

Starts with Net Income Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses

Question 652

# FAR When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

Answer 652

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

Question 653

# FAR When is APIC recorded on a stock subscription?

Answer 653

APIC increases on date subscription is recorded - not on the date paid for or issued

Question 654

# FAR To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

Answer 654

It will be restricted to the extent of the balance in the Treasury Stock account.

Question 655

# FAR When are dividends in arrear recorded for cumulative preferred stock?

Answer 655

They are not accrued until declared.

Question 656

# FAR When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

Answer 656

If a year passes and no Cumulative Preferred Stock is declared- then the dividends in arrears are included as a disclosure - not an accrual in the Financial Statements.

Question 657

# FAR What is the gain or loss when a non-monetary asset is distributed to a shareholder?

Answer 657

The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company's books

Question 658

# FAR What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

Answer 658

The effect on Retained Earnings is the Carrying Amount of the asset RE will be debited when the dividend is declared for the FMV of the asset- which is more (or less) than the carrying amount Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash The net effect of the entry is that RE will decrease by the CV of the asset

Question 659

# FAR When is Retained Earnings debited for FMV of Stock for a stock dividend?

Answer 659

When Stock Dividend is less than 25% of Common Stock outstanding

Question 660

# FAR When is Retained Earnings debited for Par Value for a stock dividend?

Answer 660

When Stock Dividend is greater than 25% of common stock outstanding

Question 661

# FAR What is the effect of a stock dividend or a stock split on total shareholder equity?

Answer 661

Stock dividends and stock splits both have no effect on Total Shareholder Equity

Question 662

# FAR What is the affect on APIC from a stock split?

Answer 662

Stock splits only affect par value - APIC remains the same.

Question 663

# FAR When is compensation expense recorded at the time of grant for a stock option?

Answer 663

Compensation expense is recorded at the time of grant if options are exercisable immediately They are based on past service. Expense recognized : FV Stock Option x # of Shares

Question 664

# FAR What interest rate is used to discount stock options?

Answer 664

The risk-free interest rate

Question 665

# FAR What date is used as the measurement date for share-based payments classified as liabilities?

Answer 665

The settlement date.

Question 666

# FAR How are compensation costs for share-based payments classified as liabilities measured?

Answer 666

Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period

Question 667

# FAR What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

Answer 667

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

Question 668

# FAR What is the primary purpose of a quasi-reorganization?

Answer 668

To eliminate a deficit balance in RE by restating its assets to Fair Value It does not directly protect a company from its creditors

Question 669

# FAR How is return on Common Stockholder's Equity calculated?

Answer 669

(Net Income - P/S Dividends) / Average Common Stockholders Equity Note: Average CSE : Common Stock + RE

Question 670

# FAR How is book value per share of common stock calculated?

Answer 670

Total Shareholder Equity - Total Preferred Stock - P/S Dividends in Arrears - P/S Liquidation Premium :Total Book Value Book Value per Share : Total Book Value / Shares outstanding

Question 671

# FAR How is the dividend per share payout ratio calculated?

Answer 671

Dividends per share / earnings per share

Question 672

# FAR How is basic Earnings Per Share (EPS) calculated?

Answer 672

(Net Income - Preferred Dividends) / Average C/S Outstanding Note - If cumulative- subtract the P/S dividend regardless of whether or not they're declared.

Question 673

# FAR For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

Answer 673

For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year

Question 674

# FAR For which areas is EPS required to be shown?

Answer 674

EPS is only required to be shown for Income from Continuing Operations and Net Income. All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes

Question 675

# FAR When do stock options increase share outstanding?

Answer 675

Only if they are dilutive. Their exercise price is LESS than the market value If not- you ignore them in the calculation

Question 676

# FAR How is EPS calculated when convertible bonds are taken into consideration?

Answer 676

[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents) Bond interest is added back because if converted- there would be no bond interest expense Contingent Issue Agreements are included in Diluted EPS if contingency is met