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Flashcards in Financial Reporting Deck (70)
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31

What is replacement cost?

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

32

What is a market cost?

The sale price of an asset (Exit Cost)

33

What is Net Realizable Value?

Sale Price of an Asset - Selling/Disposal Fee

34

When is royalty income recognized? How is it recognized?

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

35

When is revenue recognized in an installment sale?

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

36

What is deferred gross profit?

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

37

What is the cost recovery method?

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

38

What is subscription revenue? How is it recorded?

Payment has been received but performance is not complete.

As company performs revenue is recognized.

Recorded as a Deferred Revenue (Liability) on Balance Sheet

39

How are franchise revenues recorded?

Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized

40

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

Mnemonic: SPEAR-BAR

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

41

How do you calculate COGS starting from Cash Basis?

Mnemonic: CRAP-I

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

42

How are discontinued operations reported? When are they used?

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

43

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

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

44

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

Both unusual AND infrequent

Reported Net of Tax after Discontinued Operations

Note: Usual *or* Infrequent Items are reported as part of Continuing Operations

45

What is constant dollar accounting?

Adjusts assets to reflect a consistent level of purchasing power due to inflation

Uses the Consumer Price Index (CPI)

46

When are expenses recognized?

When they are incurred. Accrue if not yet paid.

47

What are accrued expenses?

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

48

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

Immediately.

49

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

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

50

What are business start-up costs?

One-time costs for opening a new business

Expensed as they are incurred

51

When is interest *not* expensed?

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

52

What are the major components of Comprehensive Income?

Net Income + Other Comprehensive Income (OCI):

Revenues/Expenses

Gains/Losses

Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity

53

What items are considered cumulative accounting adjustments?

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

54

What is the purpose of a reclassification adjustment?

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

55

Where is Comprehensive Income reported?

Reported in a Single or Combined Income Statement

56

What disclosures on accounting policies are required in financial statements?

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

57

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

Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability

58

Under Cash Basis Accounting how are Revenue and Expenses recognized?

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

59

Is Cash Basis Accounting ok for Tax Returns?

Yes

60

Is Cash Basis Accounting GAAP?

No - GAAP uses Accrual Accounting

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