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Flashcards in financial statements Deck (275):
1

How are changes in accounting principle applied?

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

2

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?

A change of principle.

Applied retrospectively.

3

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

How would this change be applied?

A change in accounting principle.

Applied retrospectively.

4

How is a change in accounting estimate applied?

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

No backwards adjustment is made.

5

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?

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

It is applied prospectively.

6

How is a correction of an accounting error made?

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.

7

What are the requirements for a prior period adjustment?

Effect is Material

Is identifiable in Prior Period

Couldn't be estimated in Prior Periods

8

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

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

9

How does an inventory error effect the financial statements?

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.

10

How is a change in entity recorded?

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

11

What is a serial bond?

Any bond that matures in installments

12

What is a term bond?

Any bond that matures on a single date

13

What is a debenture bond?

A bond not secured by any collateral

14

What is a sinking fund bond?

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

5 years of requirements and maturity details should be disclosed

15

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

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

16

How is the present value of a bond calculated?

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)

17

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

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

18

How are bonds reported when classified as trading securities?

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

19

How are bonds amortized under the interest method?

Both discount and premium amortization amounts increase each year

20

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

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

21

What is the stated rate for a bond?

Rate on the face of the bond

22

What is the market rate on a bond?

Rate that bonds are currently selling for

23

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

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

24

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

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

25

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

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.

26

When does interest expense start accruing on a bond?

When the bonds are issued

27

How is an interest payment on a bond calculated?

Cash for payment : Stated rate x Face amount

28

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

Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount

29

What are convertible bonds? Which recording method is used?

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

30

How is the retirement of bonds recorded?

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

31

When is a gain recognized in a debt restructuring?

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

32

What is the gain recognized under a settlement of debt?

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

33

For a creditor; how is a loan impairment recorded?

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

34

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

20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period

35

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

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

36

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

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

37

When is consolidation not required?

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

38

What occurs under a step acquisition?

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

39

What is the difference between an acquisition and a merger?

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

40

How are acquisition costs recorded in a merger?

Expensed in period incurred - i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional

Netted against stock proceeds:
Stock registration and issuance costs

41

What is a current asset?

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

42

What is a current liability?

A liability expected to be paid within 12 months or less

43

How is the Quick Ratio calculated?

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

44

How is the Current Ratio calculated?

Currents Assets / Current Liabilities

45

How is Working Capital calculated?

Currents Assets - Current Liabilities

46

How is A/R Turnover calculated?

Credit Sales / Average A/R

47

How is Inventory Turnover calculated?

COGS / Average Inventory

48

How is Day Sales in Inventory calculated?

365 / Inventory Turnover

49

How is Days to Collect A/R calculated?

Average A/R / Average Sales per Day

50

How are gain contingencies recorded?

They are NOT accrued due to Conservatism

51

When are loss contingencies recorded?

If Probable - they are accrued (if estimable) and disclosed

If Reasonably Possible - they are disclosed

If Remote - don't accrue or disclose

52

What is a temporary difference related to deferred taxes?

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

53

What is a deferred tax asset?

Deduction will reduce future income taxes expense.

54

What is a deferred tax liability?

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

55

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

The FUTURE enacted tax rate not the current one.

It is never discounted to present value.

56

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

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

57

What effect do permanent differences have on deferred income taxes?

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

58

What is deferred income tax expense?

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

59

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

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

60

How are derivatives recorded?

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

61

How are unrealized gains/losses on trading securities recorded?

Recorded on income statement

62

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

They are included in Other Comprehensive Income.

63

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

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

64

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

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.

65

Where are gains and losses on foreign currency hedges recorded?

In Other Comprehensive Income (OCI)

66

What disclosures are required for derivative transactions?

Objectives and Strategies

Context to help investor understand the instrument

Risk Management Policies

Complete List of Hedged Instruments

67

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

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

68

For the balance sheet which date's translation rate is used to report assets and liabilities?

The current translation rate as of the balance sheet date is used to report assets and liabilities.

69

Which date's currency translation rate is used for the reporting of revenue and expense transactions in a foreign currency?

Use the weighted average exchange rate for the current year.

70

If the functional currency is the reporting currency which exchange rate is used on the foreign currency financial statements?

Foreign Currency Financial Statements are remeasured into the Reporting Currency (Dollar) using the weighted-average exchange rate

71

Where are re-measurement gains and losses due to foreign currency translation reported?

On the income statement as Other Income.

72

What is the primary objective of accounting?

To measure income

73

What is the most authoritative set of accounting pronouncements?

The FASB Codification

All pronouncements fall under the Codification umbrella

74

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

Authoritative and Non-Authoritative

75

How does managerial accounting differ from financial accounting?

Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP

76

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

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

77

What is the focus of financial reports for individual companies?

Focus is on the needs of users to help them make decisions and assessments about the company

Does not make assessments of the economy

78

What are the Primary Constraints of Financial Reporting?

Cost vs. Benefit

Materiality

79

What are the Secondary Constraints of Financial Reporting?

Consistency - Year vs. Year

Comparability - Company vs. Company

80

What are the Qualitative Characteristics of Financial Reporting?

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


81

What are the Enhancing Qualitative Characteristics of Financial Reporting?

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

82

How does Conservatism affect the recording of accounting transactions?

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

83

What is an accrual?

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

84

What is a deferral?

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

85

What is recognition in accounting?

When an item is recorded and included in the financial statements

86

Describe fair value with respect to an asset

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

87

What market assumptions are made in a fair value assessment?

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

88

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

Price quotes or market prices

For example NYSE or NASDAQ

89

What items are included in a Level 2 valuation input?

Interest rates

Prime rate

90

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

Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation

91

What are acceptable valuation techniques for fair value?

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

92

What are current assets?

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

93

What are current liabilities?

Liabilities that will use current assets during the present operating cycle

94

What is an accrued liability?

Expense that has been incurred but not paid

Example: rents payable

95

What is a deferred revenue?

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

96

When are revenues recognized?

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

97

What is a gain?

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

98

What is a loss?

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

99

What is an operating cycle?

Average time it takes to turn materials or services into Cash

100

What is the present value of future cash flows?

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

101

What is historical cost?

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

102

What is replacement cost?

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

103

What is a market cost?

The sale price of an asset (Exit Cost)

104

What is Net Realizable Value?

Sale Price of an Asset - Selling/Disposal Fee

105

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

106

When is revenue recognized in an installment sale?

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

107

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

108

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

109

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

110

How are franchise revenues recorded?

Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized

111

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

112

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

113

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

Includes Income (or loss) from the period plus the gain (or loss) from disposal

114

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

115

What is constant dollar accounting?

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

Uses the Consumer Price Index (CPI)

116

When are expenses recognized?

When they are incurred. Accrue if not yet paid.

117

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

118

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

Immediately.

119

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

120

What are business start-up costs?

One-time costs for opening a new business

Expensed as they are incurred

121

When is interest *not* expensed?

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

122

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

123

What items are considered cumulative accounting adjustments?

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

124

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

125

Where is Comprehensive Income reported?

Reported in a Single or Combined Income Statement

126

What disclosures on accounting policies are required in financial statements?

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

127

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

Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability

128

Which Personal Financial Statements are required?

Statement of Financial Condition & Statement of Changes in Net Worth

129

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

Estimated current value

130

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?

Presented on Statement of Financial Condition between Liabilities and Net Worth

131

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

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

132

How is life insurance presented on a Personal Financial Statement?

Only shown if there is cash surrender value

It is shown net of loans against the policy

133

How are business interests shown on a Personal Financial Statement?

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

134

What is the discreet view in an Interim Financial Statement?

Interim period is a separate accounting period - not GAAP

Same accounting principles used for annual reporting should be used.

135

What is the integral view in an Interim Financial Statement?

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

136

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

Aren't prorated

Fully recognized in Interim Period as incurred

If it occurs in Q3 - it's recognized in Q3

137

How are cumulative gains and losses reported in Interim Financials?

Reported as if they occurred in the first quarter

138

How is inventory valuation handled in Interim Financials?

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

139

What is one of the primary problems with interim reporting?

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

140

For whom is Segment Reporting required?

Publicly traded companies

141

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

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

142

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

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

143

How are Research and Development costs recorded?

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

144

Which expenditures are included in the cost of a building?

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

145

Which expenditures are included in the cost of land?

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

146

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?

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.

147

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

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.

148

How is donated property recorded by the donee?

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

149

How is donation of property recorded by the donor?

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.

150

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

1 / (Useful Life x 2 x Book Value)

Ignore salvage value.

151

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

(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

152

How is straight line depreciation calculated?

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

153

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

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

154

How are legal fees to defend a patent amortized?

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

If unsuccessful they are expensed immediately.

155

What are the two steps for testing goodwill impairment?

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.

156

How are costs for developing software recorded?

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.

157

What expenditures are included in the cost of equipment?

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.

158

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

The International Accounting Standards Board (IASB)

159

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

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

160

Which framework helps to develop standards for international accounting?

The IASB Framework

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

161

What is the objective of the IFRS framework?

To provide users with information on international accounting.

162

Which assumptions are followed within the IRFS framework?

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

163

What are the Qualitative Characteristics of accounting information within IFRS?

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

164

What are the Enhancing Characteristics of IFRS?

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

165

How does comparability differ under GAAP versus IFRS?

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.

166

What is the Pervasive Constraint within IFRS?

Cost vs. Benefit

167

Which items are considered reporting elements under IFRS?

Asset
Liability
Equity
Income
Expense

168

What are the criteria for recognition on IFRS financial statements?

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.

169

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

A full comparative statement using IFRS.

170

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

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

171

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

The Fair Value election

172

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

In the entity's retained earnings or equity

173

How is going concern different under IFRS than from GAAP?

Going Concern is an assumption under IFRS

174

How are extraordinary items treated under IFRS?

IFRS doesn't allow extraordinary items.

175

How is the completed contract method used under IFRS?

Completed contract method is not allowed under IFRS.

176

How is LIFO treated under IFRS?

IFRS does not allow LIFO.

177

Which financial statements are required under IFRS?

Statement of Comprehensive Income

Statement of Changes in Equity

178

How is the term income used in IFRS?

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

179

How is the term profit used in IFRS?

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

180

How does IFRS treat gains?

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

181

How does IFRS treat losses?

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

182

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

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.

183

How do contingent liabilities differ between GAAP and IFRS?

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.

184

How are bonds recorded under IFRS?

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

185

How are deferred taxes treated under IFRS?

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.

186

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

ONLY if they are related to the same country/taxing authority


For example China Deferred Tax Assets can't offset Japan Deferred Tax Liabilities

187

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

The enacted rate or substantially enacted tax rate.

(GAAP is the enacted tax rate only)

188

Which items are recorded on the Income Statement in IFRS?

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

189

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

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

190

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

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

191

How is investment property reported under IFRS?

Initially recorded at cost

Revalued using either Fair Value model or Cost model

192

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

Recorded on the Income Statement

Investment P/L : IS

PP&E P/L : OCI

193

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

Carried at Cost minus Accumulated Depreciation

Fair Value must still be disclosed in the notes to the financial statements

194

How are leases reported under IFRS?

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

195

How are intangible assets valued under IFRS?

Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss)

or

the Revaluation Model (Fair Value less Accumulated Depreciation)

196

How is internally generated goodwill reported under IFRS?

It is not recognized.

197

How is amortization of intangibles handled under IFRS?

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.

198

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

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

199

How are defined benefit plans recorded under IFRS?

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

200

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

They can be classified as either Operating or Financing

Once a classification is chosen all future costs must be classified there

201

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

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

202

Which costs are inventoriable?

Purchases - Net of Discounts, Freight, Warehouse expenditures

203

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

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

204

When does ownership transfer when goods are sent FOB Destination?

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

205

Which costs are non-inventoriable?

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

206

When are discounts recorded under the gross method?

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

207

Under the net method, when are discounts recorded?

Under the net method, discounts are recorded whether used or not.

Unused discounts are allocated to financing expense.

208

How is gross margin calculated?

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

209

Describe the periodic inventory system.

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

210

Describe the perpetual inventory system.

Inventory count continually updated

Uses a moving-average cost flow method

211

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

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

212

How is inventory turnover calculated?

COGS / Average Inventory

213

How is Average Day's Sales in inventory calculated?

365 / Inventory Turnover

214

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

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

215

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

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

216

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

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

Misstatement of ENDING inventory does have an effect on retained earnings.

217

How does misstatement of ending inventory effect Ending Retained Earnings?

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

218

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

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

219

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

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

220

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

COGAS / Total Units : Weighted Average Cost Per Unit

221

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

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

222

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

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

223

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

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

224

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

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit

225

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

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

226

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

Included in OCI (Other Comprehensive Income)

227

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

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

228

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

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

229

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

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


230

How are Trading Securities recorded on the Balance Sheet?

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.

231

How are Trading Securities Unrealized G/L treated?

Recorded on the Income Statement

If they are reclassified as HTM or AFS - there is no effect upon transfer.

232

How is a Capital Lease recorded?

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

233

What footnote disclosures are required for a Capital Lease?

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

234

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

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

235

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

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.

236

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

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

237

What are the characteristics of a Direct Financing Lease?

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

238

How is a sale-leaseback recorded?

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

239

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

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

240

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

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

241

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

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

242

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

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

243

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

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

244

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

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%)

245

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

Fair Value for assets contributed.

Present value of remaining cash flows for liabilities assumed.

246

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

Cash received from Customers- Interest & Dividends- Trading Securities

Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities

247

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

Cash received: Sale of PP&E- Sale of Investments- Loan Principle

Cash paid: Loans- Acquisitions- AFS or HTM Securities- Taxes- Trading Securities

248

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

Cash received: Issuance of Stock- Issuance of Debt

Cash paid: Dividends

249

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

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

250

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

Starts with Net Income

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

251

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

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

252

When is APIC recorded on a stock subscription?

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

253

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

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

254

When are dividends in arrear recorded for cumulative preferred stock?

They are not accrued until declared.

255

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

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.

256

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

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

257

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

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

258

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

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

259

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

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

260

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

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

261

What is the affect on APIC from a stock split?

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

262

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

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

263

What interest rate is used to discount stock options?

The risk-free interest rate

264

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

The settlement date.

265

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

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

266

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

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

267

What is the primary purpose of a quasi-reorganization?

To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors

268

How is return on Common Stockholder's Equity calculated?

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

269

How is book value per share of common stock calculated?

Total Common Stock
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value

Book Value per Share : Total Book Value / Shares outstanding

270

How is the dividend per share payout ratio calculated?

Dividends per share / earnings per share

271

How is basic Earnings Per Share (EPS) calculated?

(Net Income - Preferred Dividends) / Average C/S Outstanding

Note - If cumulative- subtract the P/S dividend regardless of whether or not they're declared.

272

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

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

273

For which areas is EPS required to be shown?

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

274

When do stock options increase share outstanding?

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

275

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

[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