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Flashcards in Financial Statements Deck (20)
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1
Q

Recognizing inventory losses in interim statements

A

ASC Topic 270 provides that inventory losses from market declines should be recognized in the interim statements when the decline in value occurs. A temporary market decline need not be recognized in the financial statements since no loss is expected to be incurred in the fiscal year.

2
Q

Fair value measurements

A

Fair value measurement also assumes the highest and best use of the asset.

3
Q

Earnings vs comprehensive income

A

Per SFAC 5, earnings and comprehensive income have the same broad components–revenues, expenses, gains, and losses, but are not the same because certain classes of gains and losses are included in comprehensive income but are excluded from earnings.

4
Q

Loan origination costs

A

the loan origination costs are to be added to the principal, by the lender, and any fee charged to the client is deducted from the principal by both parties in calculating the carrying amount.

5
Q

Components of Income & Retained Earning statement

A

IDEA
I - Income from Continued Operations (gross & net of tax)
D - Income from Discontinued Operations
E - Extraordinary Items
A - Cumulative Effect of Change in Accounting Principle (retained earnings)

6
Q

Fundamental Qualitative Characteristics

A
Relevance (Passing Confirms Money)
- Predictive value
- Confirming value
- Materiality
Faithful Representation (Completely neutral is free from error)
- Completeness
- Neutrality
- Freedom from error
7
Q

Discontinued operations

A

Reported as discontinued operations if it:

  • has been disposed of; or
  • is classified as held for sale
  • the disposal must represent a strategic shift, or
  • have a major effect on an entity’s operations and financial results (GEL)
  • disposal of a major Geographical area
  • disposal of a major Equity method investment
  • disposal of a major Line of business
  • 3 Calculations
  • impairment loss
  • loss from operations
  • loss on sale
8
Q

Change in Accounting principle

A

When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate. Thus, the effect is reported prospectively as a component of income from continuing operations.

9
Q

Retrospective treatment

A

Restatement of all prior periods is the retroactive accounting treatment that is applied to the correction of an error and the retrospective accounting treatment given to changes in accounting principle. However, a change in accounting principle that is inseparable from the effect of a change in accounting estimate is now treated as a change in accounting estimate.

10
Q

Disposal of component of a business

A

Once the decision has been made to dispose of a component of a business and that component meets the criteria to be classified as held for sale, the operating results of the component for the period reported on, and any gain or loss from the disposal, should be reported separately from continuing operations, net of tax.

11
Q

Usual vs infrequent (gains or losses)

A

Gains or losses that are unusual in nature or occur infrequently but not both, are presented as a component of income from continuing operations.

12
Q

Extraordinary

A

unusual AND infrequent

comes after discontinued operations

13
Q

Intangibles (patents, trademarks)

A

if purchase, record asset at cost (acquisition, legal & consulting).
if developed, R&D is expense, but capitalize legal fees associated with successful defense of asset, registration or consulting fees, design costs and other direct cost to secure the asset.
- (if unsuccessful defense, then expense and test for impairment).

14
Q

Research and development costs

A

Research and development costs are expensed whether they are incurred internally or by contract with outside firms under U.S. GAAP.

15
Q

Patents (intangible assets)

A

Once the patent is established, legal costs to successfully defend the patent should be capitalized and amortized over the lesser of the patent’s useful economic life or its legal life.

16
Q

R&D is expensed

A

R&D contracted out to a third party, preproduction prototypes and models costs, and, costs for searching for new products or new process alternatives are reported as R&D expense

17
Q

Not considered R&D

A
  • Routine periodic design changes to old products or troubleshooting in production stage,
  • marketing research,
  • quality control testing and
  • reformulation of a chemical compound
18
Q

Unearned Revenue

A

When there is an unlimited right of return, nothing should be recorded as sales revenue unless four conditions are satisfied. These conditions are the following:

  • The sales price is substantially fixed (it seems like it is in this question).
  • The buyer assumes all risk of loss (no information).
  • The buyer has paid some form of consideration (no information).
  • The amount of returns can be reasonably estimated (which they can in this question).
  • Because all four conditions have not been satisfied, revenue should not be recognized until they are or until something is actually sold.
19
Q

Intangible asset vs goodwill amortization

A

Finite life intangibles are amortized over the period to be benefited. Indefinite life of goodwill is not amortized, but is instead analyzed periodically (at least annually) for impairment.

20
Q

Reversal of impairment loss is prohibited under U.S. GAAP

A

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Under U.S. GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.