Framework

Question 1

what are the accounting rules and concepts (principals) –

Answer 1

o	consistency
o	- conservatism
o	- cost/benefit
o	- matching
o	- allocation
o	- full disclosure
o	- recognition (booking an item) 
o	- realization (selling an item)

Question 2

what is the main difference between US GAAP and IFRS?

Answer 2

US GAAP is rules based, IFRS is principles based

Question 3

IASB Framework: 4 Qualitative characteristics

Answer 3

1. Relevance
2. Reliability
3. Understandability
4. Comparability / Consistency

Question 4

What are the 6 objectives of financial reporting?

Answer 4

1. To provide information that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
2. Information about a reporting entity’s economic resources and claims against the entity (Financial Position-B/S)
3. Changes in economic resources and claims
4. Financial performance reflected by accrual accounting (provides a better basis for assessing the entity’s past and future performance than does cash basis - Income Statement)
5. Financial performance reflected by past cash flow (Cash Flows)
6. Changes in economic resources and claims, NOT resulting from financial performance (ex: issuing additional stock)

Question 5

What 2 characteristics make financial statements useful?

Answer 5

F/S must be BOTH Relevant and a Faithful representation

Question 6

A full set of financial statements includes:

Answer 6

• statement of financial position (balance sheet)
• statement of earnings and comprehensive income (income statement)
• statement of cash flows
• statement of changes in owners equity (statement of investments by and distributions to owners)

Question 7

10 key elements that make up financial statements

Answer 7

• assets
• liabilities
• equity
• investments by owners
• distributions to owners
• comprehensive income
• revenue
• expenses
• gains
• losses

Question 8

definition of an asset

Answer 8

an economic resource that has a probable future benefit, one can obtain the benefit, and the transaction creating the benefit has already occurred

Question 9

definition of a liability

Answer 9

an economic obligation in which one needs to use or transfer an asset, it can’t be avoided and the transaction has already occurred

Question 10

equity consists if what 3 elements

Answer 10

• contributions / investments by owners
• distributions to owners (dividends)
• comprehensive income (all changes in equity other than “owner” sources)

Question 11

• contributions / investments by owners
• distributions to owners (dividends)
• comprehensive income (all changes in equity other than “owner” sources)

Answer 11

[DENT]

• Derivative cash flow hedges
• Excess adjustment of Pension PBO and RV of plan assets at year end
• Net unrealized gains or losses on “available for sale” securities
• Translation adjustments for foreign currency

Question 12

when do you recognize a financial statement element?

Answer 12

it meets the definition of an element (asset, liability)

• element is capable of being measured in monetary terms
• the item is relevant and faithful representation (useful)

Question 13

ways to measure a financial statement element in monetary terms

Answer 13

• historical cost
• replacement cost
• fair market value (FMV) - per ASC 820 (FASB 157) “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date”
• Net realizable value (NRV)
• Present value (PV)

Question 14

6 steps in applying the fair market value (FMV) approach

Answer 14

1. Identify the asset or liability to be measured
2. Determine the principal (highest volume) or most advantageous market (maximizes price or minimizes amt paid)
3. Determine the valuation premise (in-use or in-exchange)
4. Determine the appropriate valuation technique (market, income, cost)
5. Obtain inputs for valuation (level 1, level 2, level 3)
6. Calculate the fair value of the asset

Question 15

fair market value (FMV) valuation techniques

Answer 15

[MIC]

• Market approach
• Income approcach
• Cost approach

Question 16

inputs for FMV valuation, what do the 3 levels represent?

Answer 16

• Level 1 - uses quoted prices from active markets
• Level 2 - Directly or indirectly observable inputs, other than level 1 (yield curves, bank prime rates, interest rates, credit risks, default rates on loans) (2 similar buildings in a downtown market)
• Level 3 - Unobservable inputs are used if level 1 or 2 are not available (using financial forecasts or expected cash flow estimates) (ex. sub-prime mortgages)

Question 17

Factors that must be considered when calculating present values

Answer 17

SFAC #7

• Risk
• Timing
• Interest
• Amount of cash flows:
• – Traditional approach - use most likely cash flow amounts
• – Expected approach - use weighted avg of different possibilities

Question 18

Revenue is recognized when… (4 things)

Answer 18

• A binding arrangement exists (signed contract)
• Services rendered or delivery has occurred
• Fixed or determinable price exists
• Collection is reasonably assured

Question 19

Expenses or losses are recognized as incurred based on what methodologies (3)

Answer 19

• Cause and effect - expenses that produce revenue at identifiable points in time can be matched directly to revenues
• Systematic and rational allocation - expenses that produce revenue over long periods of time are matched to those periods using a reasonable means of allocation (depreciation)
• Immediate recognition - some expenses cannot be directly related to specific benefits and are expensed as incurred (salaries of SG&A)

Question 20

What are the 4 areas of disclosure with regard to risks and uncertainties?

Answer 20

1. Nature of operations: major products, services and markets served
2. Use and extent of estimates in preparation of financial statements
3. Certain significant estimates, and their potential impact on the amount and value of assets, liabilities, gains and losses
4. Current vulnerability associated with concentrations with respect to:
   - – Particular customers, suppliers, lenders, grantors or contributors
   - – Revenue from particular products, services or fund raising events
   - – Available sources of supply of materials, labor, or services; or of licences or other rights used in the entity’s operations
   - – Market or geographical area in which the entity conducts its operations

Question 21

What are the 3 types of notes to the financial statements and what are they used for

Answer 21

they are used to ensure that all disclosures that are required under GAAP are made

1. Summary of significant accounting policies
2. Summary of significant assumptions - for prospective FS
3. Other notes to the financial statements

Question 22

IASB Framework - items under the Relevance principal

Answer 22

IASB Framework - items under the Relevance principal [Roger is PC and Materialistic]
Relevance
- Predictive value
- Confirmatory value
- Materiality

Question 23

IASB Framework - items under the Reliability principal

Answer 23

Reliability

• Neutrality
• Faithful representation
• Substance over form
• Prudence (conservatism)
• Completeness

Question 24

IASB Framework - 2 constraints for relevant and reliable information

Answer 24

timeliness

- benefit > cost

Question 25

IFRS - 5 key elements of financial statements

Answer 25

- assets - liabilities - equity - income - expense

Question 26

IFRS definition of Income

Answer 26

IFRS - what is the term used for economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants

Question 27

IFRS - what are the 2 criteria that must be met for incorporating items on the income statement or statement of financial position

Answer 27

It meets the definition of an element and can be measured reliably