ninja notes Flashcards
(238 cards)
<p class=”large” style=”text-align:center”;>What is the primary duty of an auditor?</p>
<p class=”large” style=”text-align:center”;>To provide users of financial information with REASONABLE ASSURANCE that the financial statements are not materially misstated.</p>
<p class=”large” style=”text-align:center”;>How does a price increase affect supply?</p>
<p class=”large” style=”text-align:center”;>When the prices of an item increases supply increases- because more sellers are willing to sell.</p>
<p class=”large” style=”text-align:center”;>What is the primary objective of accounting?</p>
<p class=”large” style=”text-align:center”;>To measure income</p>
<p class=”large” style=”text-align:center”;>Under what accounting basis are individual tax returns prepared?</p>
<p class=”large” style=”text-align:center”;>Cash Basis. Note: This basis is NOT allowed for Corporations, Partnerships with a C-Corp partner, or for inventories.</p>
<p class=”large” style=”text-align:center”;>What is the auditor’s responsibility for detecting theft or fraud?</p>
<p class=”large” style=”text-align:center”;>Auditors are not responsible for detecting theft or fraud.
Instead- they are responsible for providing REASONABLE ASSURANCE that the financial statements are not materially misstated.</p>
<p class=”large” style=”text-align:center”;>What is a supply curve shift?</p>
<p class=”large” style=”text-align:center”;>When supply changes due to something other than price.</p>
<p class=”large” style=”text-align:center”;>What is the most authoritative set of accounting pronouncements?</p>
<p class=”large” style=”text-align:center”;>The FASB Codification
All pronouncements fall under the Codification umbrella</p>
<p class=”large” style=”text-align:center”;>What are the deductions to arrive at Adjusted Gross Income (AGI) for individuals?</p>
<p class=”large” style=”text-align:center”;>*MSA/HSA contributions
*Investment penalties for early withdrawal
*Self-employed medical insurance premiums
*Self-Employment Tax (approx. 50%)
*IRA Contributions
*Student loan interest (can’t be another taxpayer’s dependent)
*Moving expenses
*Alimony
*Tuition - can’t take AOC/Lifetime Learning Credit for same expense
*Teacher expenses
*Attorney fees in discrimination lawsuit</p>
<p class=”large” style=”text-align:center”;>When should an auditor be hired in relation to the balance sheet date for optimum audit planning and efficiency?</p>
<p class=”large” style=”text-align:center”;>The earlier the auditor is hired- the better for audit planning and efficiency.</p>
<p class=”large” style=”text-align:center”;>What are the characteristics of a positive supply curve shift (shift right)?</p>
<p class=”large” style=”text-align:center”;>Supply increases at each price point
Higher Equilibrium GDP
Number of sellers increases - market can get flooded
Examples: Government subsidies or technology improvements that decrease costs for suppliers</p>
<p class=”large” style=”text-align:center”;>What are the 2 Levels of Authority within the FASB codification?</p>
<p class=”large” style=”text-align:center”;>Authoritative and Non-Authoritative</p>
<p class=”large” style=”text-align:center”;>Which items can be carried over to future years on an individual tax return?</p>
<p class=”large” style=”text-align:center”;>Investment interest expense in excess of investment income
Charitable contributions
Excess Section 179
Capital losses
AMT Paid
Passive Activity Losses</p>
<p class=”large” style=”text-align:center”;>When can audit procedures be performed at interim dates?</p>
<p class=”large” style=”text-align:center”;>If Control Risk for the accounts and/or transactions is low- audit procedures can be performed at interim dates.
The auditor then reviews changes in the balances at year-end.
</p>
<p class=”large” style=”text-align:center”;>What are the characteristics of a negative supply curve shift (shift left)?</p>
<p class=”large” style=”text-align:center”;>Supply decreases at each price point
Lower Equilibrium GDP
Cost of producing item increases
Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market
</p>
<p class=”large” style=”text-align:center”;>How does managerial accounting differ from financial accounting?</p>
<p class=”large” style=”text-align:center”;>Managerial Accounting has a timeliness focus
Managerial Accounting is not required to follow GAAP</p>
<p class=”large” style=”text-align:center”;>Characterize the following carryover: Passive Activity Loss</p>
<p class=”large” style=”text-align:center”;>No carryback
Can carry forward indefinitely</p>
<p class=”large” style=”text-align:center”;>When can an auditor accept an engagement offered after the year is already closed?</p>
<p class=”large” style=”text-align:center”;>The auditor can take the engagement if they are able to overcome the limitations of the engagement.</p>
<p class=”large” style=”text-align:center”;>How does price affect the demand for an item?</p>
<p class=”large” style=”text-align:center”;>When the prices of an item increases- demand for it decreases.
</p>
<p class=”large” style=”text-align:center”;>Which financial reports are required to be filed with the SEC?</p>
<p class=”large” style=”text-align:center”;>Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed</p>
<p class=”large” style=”text-align:center”;>How is excess 179 expense carried forward?</p>
<p class=”large” style=”text-align:center”;>Carry forward to next year.
Use in any year is limited to taxable income.</p>
<p class=”large” style=”text-align:center”;>For what does an auditor use professional skepticism?</p>
<p class=”large” style=”text-align:center”;>To plan the scope of the audit
To plan the objectives of the audit</p>
<p class=”large” style=”text-align:center”;>What is a Demand Curve Shift?</p>
<p class=”large” style=”text-align:center”;>When demand changes due to something other than price.</p>
<p class=”large” style=”text-align:center”;>What is the focus of financial reports for individual companies?</p>
<p class=”large” style=”text-align:center”;>Focus is on the needs of users to help them make decisions and assessments about the company
Does not make assessments of the economy</p>
<p class=”large” style=”text-align:center”;>How long can investment interest expense in excess of investment income be carried forward?</p>
<p class=”large” style=”text-align:center”;>Indefinitely.</p>
How can analytical procedures be performed in audit planning?
The auditor can compare actual versus forecasted numbers.
What is a Positive Demand Curve Shift (Shift Right)?
When demand increases at each price point Price of substitutes go up - price of beef rises- so people buy more chicken Future price increase is expected - War in Middle East- people go out and buy gas Market expands - i.e. people get new free health care plan- demand at clinic rises Expansion - more spending increases equilibrium GDP
What are the Primary Constraints of Financial Reporting?
Cost vs. Benefit Materiality
How long is the carry forward for charitable contributions?
Can be carried forward 5 years.
What must an auditor have in order to discuss issues relating to a predecessor auditor's work?
If issues relating to predecessor auditor's work on previous Financial Statements come up during the current audit- Auditor must have client's permission to discuss the issue.
What is a Negative Demand Curve Shift (Shift Left)?
Demand decreases at each price point. Price of complement goes up - price of beef goes up- less demand for ketchup Boycott - Company commits social blunder- consumers boycott Consumer income rises - Demand for inferior goods drops as people have more money to spend Consumer tastes change Contraction - less spending decreases equilibrium GDP
What are the Secondary Constraints of Financial Reporting?
Consistency - Year vs. Year Comparability - Company vs. Company
How long is AMT paid carried forward, and how is it applied?
It can be carried forward indefinitely. It may be applied against future *regular* income tax, but not against future AMT tax liability.
What questions must an auditor ask with respect to procedures carried out by assistants?
Were they adequately performed? (Review the working papers) Are the results consistent with the audit report?
What is the Marginal Propensity to Consume?
How much you spend when your income increases Calculate: Change in Spending / Change in Income
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
How are capital losses applied in individual taxes?
$3,000 net capital loss can be taken in each year, the rest is carried forward indefinitely. The loss retains its character (STCL or LTCL).
How is audit strategy mapped out?
Auditor determines what the reporting objectives are. Auditor determines the scope of the audit.
What is the Marginal Propensity to Save?
How much you save when income increases Calculate: Change in Savings / Change in Income Also equals 1 - Marginal Propensity to Consume
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 an individual capital loss carryover differ from a corporate capital loss carryover?
Corporate capital loss carryovers may be carried back 3 years and forward 5 years. Individual capital losses are carried forward indefinitely. Individual capital loss carryovers retain their character (STCL or LTCL). Corporate loss carryovers are carried forward as STCL only.
What are the foundations of Generally Accepted Audit Standards (GAAS)?
Materiality and Audit Risk
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
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 ratio is applied to principle payments in an installment sale to determine the gain in a given year?
Gross Profit / Contract Price
What are the General Standards for auditing?
Training and Proficiency (Education and Audit Experience) Independence Due Professional Care (TIP)
How does increased spending by consumers and the government affect the demand curve?
As spending by consumers or the government increases- the demand curve increases (shifts right).
What is an accrual?
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
What is the contract price in an installment sale for income tax purposes?
Contract Price = Sales Price - Liability assumed by buyer
Describe the key components of maintaining auditor independence.
Auditor must be independent in fact and appearance Honesty No direct financial interest No indirect material financial interest
How does spending change due to the multiplier effect?
The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect. One consumer spends money- which: *Increases the income of a business *Increases the income of a vendor *Increases income of employees *Increases tax revenue
What is a deferral?
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
On an individual return, regular mortgage interest on what loan amount is deductible?
$1,000,000
Describe Due Professional Care
Technical abilities mirror those held by peers in the profession Follow GAAS Standards Obtain a Reasonable Level of Assurance Maintain Reasonable Level of Skepticism Supervise Audit Staff Review judgment at every level
```How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
What is recognition in accounting?
When an item is recorded and included in the financial statements
Interest on home equity loans up to what amount are deductible on an individual tax return?
$100,000
List the Standards of Field Work
Planning and Supervision Internal Control Evidence (PIE)
Under elastic demand- how does price affect revenues?
Price increases- Revenue decreases Price decreases- Revenue increases
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 business gift amounts are deductible on Schedule C of form 1040? What amount for service awards?
$25 per person for gifts Service awards up to $400
List the Standards of Reporting
Consistency Disclosures Opinion GAAP (CDOG)
What conditions would indicate Elastic Demand?
Many substitutes (luxury items) Considered elastic if elasticity is greater than 1 10% drop in demand / 8% increase in price : 1.25 (Elastic) Price increases- Revenue decreases Price decreases- Revenue increases
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 income can business losses offset on a 1040?
They may only offset active business income. Note: W2 wages are considered active business income.
What should an auditor do prior to accepting an audit engagement?
Review the previous financial statements Speak to third parties Contact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increases Price decreases- Revenue decreases
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 income can passive losses offset on a 1040?
Only passive income such as rental income or limited partnership income. Note: Wages are ACTIVE (cannot be offset by passive) and Interest/Dividends are PORTFOLIO (cannot be offset by passive)
What questions should be asked by an auditor prior to taking an engagement?
Note: must have permission of client to contact predecessor auditor (no permission = no engagement) Why the Auditor Change? Any Serious Discussions with Audit Committee? How is Management Integrity? Disagreements? How was Internal Control? Understand Industry or Be Willing to Learn Consider Scope Limitation - Limited evidence available = no engagement
What conditions would indicate Inelastic Demand?
Few substitutes (groceries- gasoline) Considered inelastic if coefficient of elasticity is less than 1 5% drop in demand / 10% increase in price : .5 (inelastic) Price increases- Revenue increases Price decreases- Revenue decreases
What items are included in a Level 2 valuation input?
Interest rates Prime rate
Are interest and dividends active or passive income?
Neither. They are portfolio income.
What should be included in an audit engagement agreement?
Note: must be written Objectives of Engagement Limitations of Engagement Responsibilities of Management - Provide written assertions Responsibilities of Auditor - Limited error/fraud responsibility Expectations of Access to Records Financial Statements (and Disclosures) are Management's Responsibility Compliance with Laws Internal Control
What is Unitary Demand?
Total revenue will remain the same if price is increased Considered unitary if coefficient of elasticity : 1
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 is (are) the depreciation convention(s) for personal property?
Mid-year/Mid-quarter
What is management's responsibility with respect to the financial statements?
Management is responsible for financial statements and adequacy of disclosures. ``` Presentation & Disclosure Existence (Tests Overstatements) Rights & Obligations Completeness (Tests Understatements) Valuation & Allocation
```How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in Income Normal goods greater than 1 (demand increases more than income) Inferior goods less than 1 (demand increases less than income)
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
When is the mid-quarter convention used?
For depreciation when 40% or more of all purchases occur in 4th quarter.
What is the purpose of the Audit Committee?
Responsible for Hiring Auditor Oversees Internal Control Must Agree with Auditor on: Responsibility of the Parties- Audit Fee- Timing of the Audit- Audit Plan Acts as Liaison Between Auditor and the Board Auditor Communicates Concerns about: Internal Control Deficiencies- Errors- Fraud- Illegal Activities
What conditions occur under periods of inflation?
Interest rates increase Reduced demand for loans Reduced demand for houses- autos- etc. Value of bonds and fixed income securities decrease Inferior good demand to increase Foreign goods more affordable than domestic Demand for domestic goods decrease
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
What depreciation convention is used for real property?
Mid-month
How is Audit Risk calculated?
Inherent Risk x Control Risk x Detection Risk Risk that material mistakes- errors- omissions- or fraud will result in an inaccurate audit report Based on Auditor Judgment Measured in both Qualitative and Quantitative
What happens under Demand-Pull inflation?
Overall spending increases Demand increases (shifts right) Market equilibrium price increases
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
What depreciation life and convention are used for leasehold improvements?
15 year straight line (S/L)
Describe Control Risk
Risk that internal control will not detect error or fraud Auditor cannot control this.
What happens under Cost-Push inflation?
Overall production costs increase Supply decreases (shifts left) Market equilibrium price increases Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
What is an accrued liability?
Expense that has been incurred but not paid Example: rents payable
What amount of business start-up costs can be deducted? How is it expensed?
Up to $5,000 Amortized over 180 months Reduced dollar-for-dollar by amount over $50,000
Describe Inherent Risk.
Which transactions have a higher level of risk? Auditor cannot control
What is the Equilibrium Price?
The price where Quantity Supplied : Quantity Demanded
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
How are medical expenses deducted on a 1040?
On Schedule A: Amounts in excess of 10% of AGI may be deducted
Describe Detection Risk.
Will the auditor fail to detect a material misstatement? Auditor CAN control Do testing at year-end Increase substantive testing Run more effective tests
What is Optimal Production?
When Marginal Revenue : Marginal Cost
When are revenues recognized?
When they have been earned; i.e. company has performed
Which personal insurance premiums are not deductible as medical expenses on Schedule A?
Accident or disability insurance premiums are not deductible.
What responses should an auditor take based on different levels of acceptable detection risk (DR)? What type of tests should be performed?
Less Acceptable DR = Run More Substantive Tests More Acceptable DR = Run Less Substantive Tests More Substantive Tests (DR down) = Less Audit Risk; (AR = IR x CR x DR) Less Substantive Tests (DR up) = More Audit Risk; (AR = IR x CR x DR)
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
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
Under what circumstances can medical expenses paid on behalf of another be deducted on someone's Schedule A?
Must be a citizen of North America Must live with you, or if they do not, must be mother/father or a relative closer than a cousin. Benefactor must provide more than 50% support to the beneficiary.
What are quantitative measurements versus non-quantitative measurements with respect to risk?
Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of percentages Non-Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of acceptable ranges
What is GDP (Gross Domestic Product)?
The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests Included: Foreign company has US Factory Not included: US company has foreign factory
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
Which foreign taxes are deductible?
Foreign INCOME and REAL ESTATE taxes are deductible. Foreign personal property taxes are NOT deductible. Foreign tax assessments are not deductible- they are added to the basis.
Whose responsibility is it to FIND and PREVENT fraud?
It is Management's responsibility.
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp Income Passive Income Taxes Employee Salaries Foreign Income Adjustments Depreciation
What is an operating cycle?
Average time it takes to turn materials or services into Cash
How is net investment income calculated, for the purpose of deducting excess investment interest expense?
Gross investment income - investment expense in excess of 2% of AGI = net investment income Investment interest expense in excess of net investment income is deductible.
What is the auditor's responsibility with respect to fraud and illegal acts?
Assess the RISK that such things will lead to material misstatements Design the audit to provide reasonable assurance against fraud- illegal acts that directly and materially affect the financial statements Report ALL management fraud to the audit committee (minor fraud by low-level employees not reported to committee) Perform required inquiries and procedures (management inquiries- analytical procedures- discussions with audit personnel about fraud)
What is included under the Expenditure Approach for calculating GDP?
Individual Consumption Private Investment Government Purchases Net Exports
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 investment interest is never deductible?
Investment interest expense on tax-free securities is not deductible.
What are the three factors that affect/influence fraud?
Fraud is born out of: Rationalization Incentive Opportunity (RIO)
What is Nominal GDP?
Measures goods/services in current prices.
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
When are mortgage points deductible and how are they deducted?
They are deductible if they represent prepaid interest on purchase of a new home or improving a home. Refinance points are amortized over the life of the mortgage.
What is the difference between fraud and errors?
Errors are unintentional- fraud is intentional.
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
How are charitable contributions of LTCG property and property related to a charity's function deducted?
Deducted at fair market value (FMV), up to 30% of AGI
What red flags may indicate higher risk in an audit?
Management compensation tied to stock Aggressive financial forecasting Former auditor disagreed with Management Records not available for audit Current audit procedures may need to be reconsidered if red flags exist.
What is Real GDP?
Nominal GDP / GDP Deflator x 100
What is a market cost?
The sale price of an asset (Exit Cost)
How are charitable donations for STCG property and property not related to the charity's function deducted on Schedule A?
Deduction is taken for adjusted basis in the property, up to 50% of AGI.
Describe the characteristics of a Fraud Risk Factor.
Has been observed in similar situations Does NOT necessarily mean that there is a material weakness in internal control Leads to an auditor taking action
What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
Does a casualty loss affect the basis of property?
No. It decreases the fair market value (FMV) of the property.
What does an examination of internal control accomplish with respect to illegal acts?
Internal control analysis can result in the conclusion that IC is weak- but probably won't identify illegal acts
What is the Consumer Price Index (CPI)? How is it applied?
Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0 ((CPI Current - CPI Last) / CPI Last) * 100
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
How is the deductible portion of a casualty loss calculated?
Take the lower of either A) Decrease in FMV or B) Basis in property (call this number GROSS LOSS) GROSS LOSS - insurance proceeds received - $100 - 10% of AGI = Deductible casualty loss
What is the purpose of adjusting audit procedures in light of fraud risk factors identified during an audit?
Strives to make audit engagement procedures less patterned and predictable Re-evaluates management's application of accounting procedures Finds and assigns audit personnel with relevant skills in this area
How is disposable income calculated?
Personal Income - Personal Taxes
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash Only used when cash collection is uncertain
What are the miscellaneous deductions on Schedule A, and how are they deducted?
Deductible in excess of 2% of AGI Continuing Education - if required to keep your job Business travel 50% Meals and entertainment Union Dues Tax prep fees Legal fees to collect alimony Appraisal fees to value casualty loss of charitable contributions
What should be documented with respect to fraud risk factors in an audit?
Any fraud risks identified that could lead to material misstatement Audit procedures performed to assess risks Nature of communication made to audit committee and company management Disclosure to third parties regarding fraud not normally the auditor's responsibility Fraud by management should normally be reported to the audit committee- NOT the SEC.
How is Return to Scale calculated?
% Increase in output / % Increase in input Greater than 1 : Increasing returns to scale Less than 1 : Decreasing returns to scale
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
Which itemized deductions are not subject to phaseout based on income or other factors?
Medical Casualty Gambling Investment Interest Expense
What was the effect of the SOX Act of 2002?
Created PCAOB Designates Officer responsibility for internal control Must disclose significant internal control weaknesses to auditor and audit committee Must disclose any level of fraud discovered by employees with internal control responsibilities
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
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
Define qualifying child for most individual tax factors.
Must be resident of North America Under age 19, or under age 24 if a student
What is the Hierarchy of Authoritative Literature?
1. Statements on Auditing Standards (SAS) 2. Auditing Interpretations- AICPA Guides & SOPs 3. Industry Articles (no authority)
What is a Depression?
A prolonged- severe recession with high unemployment rates No requisite period of time for the economy to officially be in a depression
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
Define qualifying relative for most individual tax factors?
Must be citizen of North America Must live with you, unless mother/father or relative closer than a cousin You must provide more than 50% support to the individual
What quality control activities are undertaken by CPA firms with audit practices?
Firm Leadership exhibits quality and leads by example and sets the tone for the organization Firm should Monitor and document that its policies and procedures are being followed Firm should have Relevant Ethical Requirements Acceptance and continuance of client engagements should continue to be evaluated for client integrity- auditor competency- and legality Firm should have competent and ethical personnel Firm engagements are performed- supervised- and reviewed in accordance with professional standards and regulations.
What are the stages of the Economic Cycle?
Peak (highest) Recession (decreasing) Trough (lowest) Recover (increasing) Expansion (higher again)
How are franchise revenues recorded?
Franchiser - Startup franchise fee revenue deferred until franchisee has completed substantial performance Franchisee - Costs are deferred until corresponding revenue is recognized
How is minor income taxed at a parent's rate calculated (AKA kiddie tax)?
Child's unearned income - early withdrawal penalties - $1,000 - Greater than $1,000 or child's itemized deduction related to unearned income = Amount taxed at parents' rate
Which literature governs Compilation services?
SSARS - Statements on Standards for Accounting and Review Services These govern reporting for non-public entities only
What are leading indicators?
Conditions that occur before a recession or before a recovery Example: Stock Market or New Housing Starts
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
Can spouses married filing jointly use different accounting methods?
Yes, if they each own a small business. All non-business income is cash basis.
What is the independence requirement for Compilations?
Independence NOT required for Compilations No Internal Control work allowed No assurance given
What are lagging indicators?
Conditions that occur after a recession or after a recovery Examples: Prime Interest Rates- Unemployment
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
```At what rate is self-employment tax assessed?
15.3% of net earnings from self-employment (Note: executor of an estate is NOT self-employment income)
What type of assurance is provided by a Compilation?
Compilations are not an assurance service. No assurance is provided.
What are coincident indicators?
Conditions that occur during a recession or during a recovery Example: Manufacturing output
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 is a refundable tax credit? Which individual tax credits are most commonly refunded?
A tax credit which takes the taxpayer's tax owed on the return below zero, resulting in a refund to the taxpayer. Earned Income Credit (EIC), American Opportunity Credit and the Additional Child Tax credit. Note: the REGULAR child tax credit is NOT refundable.
What type of assurance is provided by Review services?
Reviews provide NEGATIVE assurance.
Which people are included in the calculation of unemployment?
Only people looking for jobs
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
How many education credits may be taken on a tax return?
American Opportunity Credit - per student Lifetime Learning Credit - per taxpayer Note: The American Opportunity Credit is refundable.
What is the independence requirement for a Review?
Reviews require independence. No Internal Control work allowed Performs analytical procedures No material indirect financial interest allowed No immaterial direct financial interest allowed
What is Cyclical Unemployment?
GDP doesn't grow fast enough to employ all people who are looking for work Example: People are unemployed in 2010 because there aren't enough jobs available due to the economy
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation Uses the Consumer Price Index (CPI)
What estimated tax payments must be paid in by an individual taxpayer either via withholding or by quarterly tax payments?
The lesser of: 90% of current year's total tax 100% of prior year's total tax 110% of prior year's total tax (if AGI is $150,000 or more)
For compilations and reviews- what knowledge must a service provider have?
Must have an understanding of the client industry.
What is Frictional Unemployment?
People are changing jobs or entering the work force. This is a normal aspect of full employment. Example: A recent college graduate is looking for a job
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
Which farming costs related to land are deductible? Which aren't?
Deductible: Costs incurred to PRESERVE soil/water Non-deductible: Costs incurred to drain wetlands or prep for irrigation (i.e. improve land)
What are attestation services?
CPA expresses a conclusion about an assertion - Compliance with laws NOT considered a Consulting engagement Independence Required
What is Structural Unemployment?
A worker's job skills do not match those necessary to get a job so they need education or training Example: A construction worker wants to work in an office- so they quit their job and get computer training
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
Which depreciation table is used for personal tangible property related to farming?
MACRS 150
What is the independence requirement for consulting services?
Independence is not required for consulting services.
How does inflation relate to unemployment?
High Unemployment : Low Inflation (Vice Versa)
When should impaired assets be written down to fair value and expensed?
Immediately.
How long does the taxpayer have to petition the court for appeal after an audit?
90 days
Describe the limitations on Prospective Financial Statements?
Report is restricted to specified users. Agreed-upon procedures are implemented.
What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
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
If no petition to appeal is filed, how long does a taxpayer have to pay tax due after an audit?
10 days
What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
What are business start-up costs?
One-time costs for opening a new business Expensed as they are incurred
What is the statute of limitations for a tax audit?
3 years, generally 6 years if 25% or more of gross income was omitted The clock starts on the LATER of the due date or the filing date of the return. There is NO STATUTE OF LIMITATIONS for either fraud or failure to file a required return.
What is the Real Interest Rate?
Inflation-adjusted interest rate
When is interest *not* expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
How is non-business bad debt deducted on a 1040?
It is treated as a STCL
What is the Nominal Rate?
Rate that uses current prices
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
How long does an individual taxpayer have to file a claim for refund?
Refunds must be claimed within 3 years of the return due date or within 2 years of being paid, whichever is later.
What is the Risk-Free Rate?
Rate for a loan with 100% certainty of payback. Usually results in a lower rate. US Treasuries are an example.
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments Unrealized gains on AFS Securities Minimum Pension Liability adjustment for defined benefit plans
When are life insurance premiums of an employee includable in income?
Premiums paid by an employer for coverage in excess of $50,000 per employee are includable in income.
What is included in the M1 money supply?
Currency- Coins- and Deposits
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
When are scholarships not taxable?
When they are not in return for services rendered, AND The money is used *only* for tuition and books Note: Scholarships for room and board are includable in income.
What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
What interest income is tax free?
State & municipal bond interest US EE Savings Bond interest (note: HH bond interest is taxable)
What is Deficit Spending?
Increased spending levels without increased tax revenue. Lower taxes without decrease in spending Gamble that the multiplier effect will take over and boost economy
What disclosures on accounting policies are required in financial statements?
Accounting Principles used Basis of Consolidation Inventory Pricing Methods Depreciation Method Amortization of Intangibles
Which dividend income is tax free?
S-corporation (actually distributions) Life insurance
How can the Fed control the money supply?
By buying and selling the government's securities.
What are some major risks and uncertainties that must be disclosed?
Nature of Operations Use of Estimates and listing of Significant Estimates Concentration vulnerability
How much social security income can be taxed for individuals in higher income brackets?
Up to 85%
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
Is unemployment compensation taxable?
Yes.
What is a Tariff?
A tax on imported goods
Which damages awarded in lawsuits are taxable? Which are not?
Payments made to make you whole are NOT taxable (i.e. to pay for losses of property, body parts or earning ability) Any payments for punitive damages ARE taxable.
What is a quota?
A limit on the number of goods that can be imported
Are workman's compensation insurance benefits taxable?
No - similar to an award for damage to make a person whole.
How do international trade restrictions affect domestic producers?
They are good for domestic producers. Demand curve shifts right Fewer substitutes They can charge higher prices
Which of the following are taxable: Child Support, Divorce Property Settlements, Alimony
Alimony IS taxable. Child support and divorce property settlements are NOT taxable.
How to international trade restrictions affect foreign producers?
They are bad for foreign producers Demand curve shifts left Fewer buyers They must charge lower prices
Adoption expenses - Are they deductible?
NO, they are not deductible. However tax benefits are available through the adoption CREDIT.
How do international trade restrictions affect foreign consumers?
They are good for foreign consumers Supply curve shifts right Goods purchased at lower prices in the foreign markets
Describe alimony recapture.
2nd Year: (3rd year - 2nd year - $15,000) 1st Year: 1st Year Alimony Paid - Avg alimony paid in 2nd & 3rd years - $15,000 - Recapture from 2nd year =1st Year Alimony Recapture Total Recapture = 1st Year Recapture + 2nd Year Recapture
How do international trade restrictions affect domestic consumers?
They are bad for domestic consumers Supply curve shifts left Fewer goods bought due to higher prices
How are Net Operating Losses (NOLs) utilized?
Can be carried back 2 years If any left, can be carried forward 20 years.
What is Accounting Cost?
Explicit (Actual) cost of operating a business Implicit costs are opportunity costs
Which IRA contributions are deductible?
Traditional IRA = deductible Roth IRA = not deductible
What is Accounting Profit?
Revenue - Accounting Cost
When can a couple file married filing jointly?
They must be married at the end of the year. If one spouse dies, they must be married at the end of the year.
What is Economic Cost?
Explicit + Implicit Cost
What are the requirements for filing as Head of Household?
Must have a dependent child Must provide more than 50% of the child's support Must live with them more than 50% of the year
What is Economic Profit?
Revenue - Economic Cost
What are the requirements for filing as qualifying widower?
Must have a dependent child. Essentially gets MFJ status for the year of death + 2 tax years
