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Flashcards in new current Deck (120):

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


What is a current liability?

A liability expected to be paid within 12 months or less


How is the Quick Ratio calculated?

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


How is the Current Ratio calculated?

Currents Assets / Current Liabilities


How is Working Capital calculated?

Currents Assets - Current Liabilities


How is A/R Turnover calculated?

Credit Sales / Average A/R


How is Inventory Turnover calculated?

COGS / Average Inventory


How is Day Sales in Inventory calculated?

365 / Inventory Turnover


How is Days to Collect A/R calculated?

Average A/R / Average Sales per Day


How are gain contingencies recorded?

They are NOT accrued due to Conservatism


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


What is the primary objective of accounting?

To measure income


What is the most authoritative set of accounting pronouncements?

The FASB Codification

All pronouncements fall under the Codification umbrella


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

Authoritative and Non-Authoritative


How does managerial accounting differ from financial accounting?

Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP


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

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


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


What are the Primary Constraints of Financial Reporting?

Cost vs. Benefit



What are the Secondary Constraints of Financial Reporting?

Consistency - Year vs. Year

Comparability - Company vs. Company


What are the Qualitative Characteristics of Financial Reporting?

Relevance & Faithful Representation

Relevance - Makes a difference to the user
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions

Faithful Representation
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


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


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


What is an accrual?

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


What is a deferral?

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


What is recognition in accounting?

When an item is recorded and included in the financial statements


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


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


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

Price quotes or market prices

For example NYSE or NASDAQ


What items are included in a Level 2 valuation input?

Interest rates

Prime rate


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

Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation


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


What are current assets?


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


What are current liabilities?

Liabilities that will use current assets during the present operating cycle


What is an accrued liability?

Expense that has been incurred but not paid

Example: rents payable


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


When are revenues recognized?

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


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


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


What is an operating cycle?

Average time it takes to turn materials or services into Cash


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


What is historical cost?

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


What is replacement cost?

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


What is a market cost?

The sale price of an asset (Exit Cost)


What is Net Realizable Value?

Sale Price of an Asset - Selling/Disposal Fee


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


When is revenue recognized in an installment sale?

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain


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


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


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


How are franchise revenues recorded?

Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized


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


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


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


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


What is constant dollar accounting?

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

Uses the Consumer Price Index (CPI)


When are expenses recognized?

When they are incurred. Accrue if not yet paid.


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


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



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


What are business start-up costs?

One-time costs for opening a new business

Expensed as they are incurred


When is interest *not* expensed?

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


What are the major components of Comprehensive Income?

Net Income + Other Comprehensive Income (OCI):



Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity


What items are considered cumulative accounting adjustments?

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans


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


Where is Comprehensive Income reported?

Reported in a Single or Combined Income Statement


What disclosures on accounting policies are required in financial statements?

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles


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

Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability


Which Personal Financial Statements are required?

Statement of Financial Condition & Statement of Changes in Net Worth


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

Estimated current value


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


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

- Liabilities
- Estimated taxes on assets sold
: Net Worth


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


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


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.


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


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


How are cumulative gains and losses reported in Interim Financials?

Reported as if they occurred in the first quarter


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


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


For whom is Segment Reporting required?

Publicly traded companies


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


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


How are Research and Development costs recorded?

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


Which expenditures are included in the cost of a building?

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


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


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.


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.


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


How is donation of property recorded by the donor?

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.


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

1 / (Useful Life x 2 x Book Value)

Ignore salvage value.


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


How is straight line depreciation calculated?

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


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


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.


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.


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.


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
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.


Which costs are inventoriable?

Purchases - Net of Discounts, Freight, Warehouse expenditures


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


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


Which costs are non-inventoriable?

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers


When are discounts recorded under the gross method?

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


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.


How is gross margin calculated?

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


Describe the periodic inventory system.

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.


Describe the perpetual inventory system.

Inventory count continually updated

Uses a moving-average cost flow method


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.


How is inventory turnover calculated?

COGS / Average Inventory


How is Average Day's Sales in inventory calculated?

365 / Inventory Turnover


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.


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.


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.


How does misstatement of ending inventory effect Ending Retained Earnings?

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under


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


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


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

COGAS / Total Units : Weighted Average Cost Per Unit


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.


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


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


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