Part I: Framework, Overview, and F/S Flashcards Preview

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Flashcards in Part I: Framework, Overview, and F/S Deck (144):
1

primary purpose of F/S

provides information to aid the decision-making of users of F/S

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F/S users use this info to:

1. Make investment decisions.
2. Make credit decisions.
3. Assess timing and amounts of cash flows
4. Assess economic benefits and obligations

3

GAAP addresses three main aspects of F/R:

Recognition, measurement, and disclosure.

4

recognition (GAAP)

when an item is recorded on the F/S

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measurement (GAAP)

how an item is recorded on the F/S

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disclosure (GAAP)

disclosing anything not on the F/S

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FASB

private standard-setting body that establishes GAAP

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How many members are on FASB?

7 full-time members

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mission on FASB

improve the accuracy of F/R, address deficiencies, and promote intl. convergence.

10

standard-setting process

1. A project gets added to the agenda.
2. Conduct research and issues a discussion memorandum.
3. They hold public hearings on the topic.
4. Evaluate research and comments from interested parties and then issue an Exposure Draft, this is the first version of the new standard.
5. They solicit additional comments and modify the Exposure Draft if needed.
6. They finalize the new accounting guidance by a vote, they need a majority vote which is 4/7 FASB members. If approved, they issue the new standard as an Accounting Standard Update (ASU).

11

Financial Accounting Foundation (FAF)

appoints board members, advisory councils, ensures funding, and exercises oversight.

12

Financial Accounting Standards Advisory Council (FASAC)

Advises the FASB on current and possible new agenda items, and helps w/the formation of task forces for certain issues.

13

Emerging Task Force (EITF)

provides implementation guidance w/in GAAP (similar to IFRS Interpretation Committee)

14

When was the SEC formed?

By Congress in the 1933 Act

15

What authority does the SEC have over GAAP? Over IFRS?

The SEC has enforcement authority; it had establishment authority, but they delegated that to FASB.
The SEC also enforces IFRS for foreign registrants.

16

AICPA

Professional organization for practicing CPAs

17

What influence does the AICPA have on the standard-setting process?

Substantial influence.

18

2 types of GAAP

authoritative and non-authoritative

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authoritative

1. Accounting Standards Codification- FASB, APB, and CAP pronouncements.
2. SEC guidance for public companies.

20

non-authoritative

FASB Concepts, AICPA issue papers, IFRS

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deferred revenue

cash is received before the revenue is actually earned

e.g. selling gift cards

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accrued revenue/A/R

revenue is earned before cash is received

e.g. selling items on credit

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deferred expense

cash is paid before expense is incurred

e.g. prepaids

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accrued expense

expense is incurred before cash is paid

e.g. salaries payable

25

I/S

reports accrual-based performance over a period of time, usu. the fiscal year

26

statement of comprehensive income (SCI)

reports non-owner changes to equity over the fiscal year

27

main elements of SCI

1. Unrealized G/L on AFS securities.
2. Unrealized G/L on pension costs/pension adjustments.
3. Foreign currency translation adjustments.
4. Unrealized G/L on certain derivative/hedge accounting transactions.

28

B/S

statement of financial position; reports economic resources and obligations as of a specific date

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How are assets reported on the B/S?

In order of liquidity.

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How are liabilities reported on the B/S?

In order of maturity.

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statement of stockholders' equity

reports the changes related to owners' equity over a period of time

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SCF

reports changes in cash over a period of time

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3 sections of SCF

operating
investing
financing

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operating (SCF)

CFs related to IS items

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investing (SCF)

CFs related to LT assets and investments

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financing (SCF)

CFs related to liabilities and owners' equity

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footnotes

1. Capture info not contained in F/S.
2. Key part of F/S.
3. Provide info. about assumptions and estimates.
4. MD&A.
5. Required in times of price instability to discuss the effects of the instability on the company's business.

38

auditor's opinion

opinion on whether the F/S comply w/GAAP

39

Accounting Standards Codification

one-stop-shop of all GAAP sources (FASB, APB, CAP)
a.k.a. Financial Accounting Codification

40

Updates to the codification are made through...

Accounting Standards Updates (ASUs).

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Goals of the ASC

1. Simplify GAAP
2. Put all GAAP into one place.
3. Make it easier to research issues.
4. Reduce risk of noncompliance.
5. Facilitate the updating of GAAP.
6. Assist w/IFRS convergence.

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conceptual framework

guiding principles of GAAP

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main goal of conceptual framework

decision usefulness

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2 primary qualitative characteristics

relevance and faithful representation

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relevance (components and definitions)

Predictive value: Makes predictions about future events.

Confirmatory value: Provides info about earlier expectations or predictions.

Material: Info matters to the user.

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faithful representation (components and definitions)

Completeness: all necessary facts are included

Neutral: free from bias

Free from (material) error

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4 enhancing characteristics

Comparability: can info be used to compare w/other companies in same industry

Verifiability: Independent observer would reach same conclusion

Timeliness: Info is recent enough to make a decision with

Understandability: user w/reasonable understanding of business can understand and draw conclusions from info.

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fair value (FV)

price received for asset when sold in open market

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FV assumptions

1. Transaction takes place in the most advantageous market available to the entity that maximizes the selling price.
2. Buyer/seller willing and able to do business and each acting in self-interest.
3. No coercion to enter transaction- both independent.
4. Highest and best use

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Highest and best use considers what is...

Physically possible.
Legally permissible.
Financially feasible.

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approaches for determining FV

market approach- prices generated by real transactions for the same or items

income approach- discounts future amounts to PV

cost approach- uses current amount required to replace the service value of an existing asset

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FV option is not available for...

1. Investments in entities that will be consolidated.
2. Obligations or assets related to pension or other employee-oriented plans.
3. Lease-related fin. assets or liabilities.
4. Demand deposits of fin. institutions.
5. Instruments that are components of shareholders' equity.

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FV can be elected only when...

1. Item is first recognized/acquired.
2. Eligible firm commitment occurs.
3. Accounting treatment of an investment in another entity changes.

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instrument-by-instrument basis

Not all instruments have to be measured under FV, but, for an instrument that is, the whole instrument must be measured under FV.

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FV accounting at eligible election date

Determining carrying value (CV) and FV and recognize CV - FV as:
1. Write-up or write-down.
2. Increase (gain) or decrease (loss) in current income

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inputs

assumptions and data used to determine FV

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observable inputs

derived from market data independent of entity; most desirable

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unobservable inputs

based on entity's best estimates/assumptions

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Level 1 of FV hierarchy

quoted market prices in an active market (involves observable inputs)

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Level 2 of FV hierarchy

observable inputs that don't meet all requirements for Level 1.

Either quoted prices in active market for similar items or quoted prices in inactive markets.

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Level 3 of FV hierarchy

unobservable inputs.

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disclosure requirements for FV

1. FV at the reporting date.
2. Valuation techniques used to determine the FV.
3. Inputs used to determine FV.
4. Items FV option is applied to.
5. Amounts of gains and losses associated w/FV changes.

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SEC's purpose of enforcing compliance w/GAAP

To promote efficient allocation of capital through open, orderly, and fair securities markets.

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structure of the SEC

1. Five commissioners appointed by POTUS.
2. Four divisions:
Corp. finance
Enforcement
Markets and trading
Investment Management

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corporate finance (SEC structure)

oversees compliance, and company filings are submitted to this division

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enforcement (SEC structure)

investigates violations, makes recommendations for punishment

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markets and trading (SEC structure)

oversees the secondary markets and exchanges, brokers and dealers

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investment management (SEC structure)

oversees investment advisors and investment companies

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Financial Reporting Releases (FRR)

formal SEC pronouncements. The highest-ranking authoritative source for public companies.

70

Staff Accounting Bulletins (SAB)

SEC's current position on technical issues

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Accounting and Auditing Enforcement Releases (AAER)

reports that detail enforcement actions

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F/S required for an IPO

1. 2 B/Ss
2. 3 I/Ss, SCFs, and statements of shareholders' equity

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IPO process

1. Issuer
2. Underwriter
3. Dealer
4. Public

74

Regulation S-X

provides detailed guidance on reporting requirements

75

Form 10-K

annual filing. Must be audited by an independent, objective auditor.

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Form 10-Q

quarterly filing; not audited, but is reviewed by an auditor.
Disclosures in the 10-Q are not nearly as extensive as in the 10-K.

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Form 8-K

for significant events

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current assets

assets used within one year

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current liabilities

liabilities expected to be used within one year

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non-current assets and liabilities

are not used within one year

81

contributed capital

amount contributed by owners such as common and preferred stock

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retained earnings

NI - dividends paid

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revenue/(expenses)

increases/(decreases) in net assets from primary activities

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gains/(losses)

increases/(decreases) in net assets from incidental activities

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comprehensive income

NI + OCI

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Comprehensive income can be presented in 2 ways:

1. In combination w/I/S (OCI would be added just below NI)
2. As a separate F/S.

87

statement of changes in equity

This statement shows changes during the year for the following items:
1. Common stock
2. Preferred stock
3. APIC
4. Ret. earn.
5. Treas. stock
6. AOCI

88

statement of cash flows (SCF). What do SCF users want?

shows changes in cash during period; users want to know about a company's ability to generate and control cash in order to assess the company's ability to meet its obligations

89

direct method (SCF)

1. Directly shows the amount of cash inflows and outflows from operations.
2. Operating section is separated into cash inflows and cash outflows.

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indirect method (SCF)

1. Starts w/NI and reconciles down to net cash provided by operating activities.
2. Most large companies use the indirect method.

91

Managements' Discussion and Analysis (MD&A)

1. Required part of F/S notes for issuers.
2. Discusses operations, liquidity, and capital resources.

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liquidity/solvency ratios

measure a firm's efficiency and ability to meet obligations.

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working capital

current assets - current liabilities

Measures extent to which current assets can cover current liabilities.

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current ratio

current assets / current liabilities

Puts working capital in ratio form.

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acid/quick ratio

(Cash + A/R + mkt. securities) / current liabilities

Uses most liquid assets to measure the ability to meet obligations.

96

times interest earned (TIE) ratio

EBIT/Interest Expense

Measures ability of current earnings to cover interest costs for the period.

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A/R turnover

Net sales / Avg. A/R

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# of days in AR

365 / A/R turnover

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Inventory turnover

CoGS / Avg. Inventory

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# of days in inventory

365 / Inventory turnover

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profitability/equity ratios

measure operations results and measure sources of equity

102

profit margin

NI / Sales

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return on assets (ROA)

NI / Avg. total assets

Measures ROA and how effectively total assets generate NI.

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return on equity (ROE)

NI / Avg. comm. shareholders' Equity

Measures rate of earnings on common shareholders' investment.

105

earnings per share (EPS)

(NI - pref. dividends) / Weighted avg. common shares

Measures income per share of common stock.

106

price-earnings (P/E) ratio

stock price per share/ EPS

Measures price of the stock relative to its EPS- this is an indicator of market value.

107

special purpose frameworks

non-GAAP accounting frameworks used by non-public U.S. businesses.

108

OCBOA

name for non-GAAP frameworks; known as Other Comprehensive Basis of Accounting

109

types of OCBOAs

1. Cash basis.
2. Modified cash basis.
3. Income tax basis.
4. Regulatory basis.
5. Other basis if there's substantial support.

110

cash basis F/S

1. Based solely on cash receipts and cash spent.
2. Usu. used by small, closely-held businesses.

111

modified cash basis F/S

combo of cash and accrual basis

112

Differences between cash basis and modified cash basis...

Include the recognition of:
1. Inventory.
2. Fixed assets (depr. or amortization)
3. Payables.
4. A/R.
5. Interest-bearing payables.

113

income tax basis F/S

Based on income tax rules.
1. Taxable amount is revenue.
2. Deductible amount is expense.

114

nontaxable and nondeductible items under income tax basis F/S

1. Interest from municipal bonds.
2. Life insurance premiums.
3. Fines.

115

"Other" basis may include reporting framework set by...

1. State insurance regulatory agency.
2. Public utility regulatory agency.
3. Certain F/S required by a lender.

116

personal F/S (PFS)

prepared for individuals or families for use for personal borrowing, financial planning, or legal requirements.

117

PFSs include...

1. Required: Statement of financial position (B/S).
2. Optional; often provided: Statement of changes in net worth.

118

statement of financial position (PFS)

1. Prepared based on accrual accounting and FV measurement.
2. Assets are reported at current FVs.
3. Liabilities are reported at current amounts.
4. Personal net worth = Assets - Liabilities.

119

Private Company Council (PCC)

1. Works w/FASB to make certain standards more usable for private companies.
2. Focus is on relevance of information vs. cost-benefit.

120

goodwill (private companies)

1. Amortized over 10 years.
2. Entity must elect to apply goodwill at the reporting unit or entity level
3. Test for impairment when a triggering event occurs.

121

hedge accounting (private companies)

1. Rules are simplified for interest rate swaps.
2. Entity may assume 100% effectiveness if criteria is met, instead of rigorous testing for ineffectiveness.

122

intangibles

1. such as customer-related or non-compete agreements are not required to be recognized separate from goodwill.
2. Separable intangibles- copyrights, trademarks- must be recognized separately.

123

Variable Interest Entities (VIE)

In certain instances, the relationship w/lessors do not to be evaluated as a VIE.

124

interest rate swap

turns a variable-interest rate debt into fixed-rate debt

125

liquidation basis of accounting

used when a company is going to cease all activities
1. Assets are measures at the amount of cash they are expected to sell for in liquidation.
2. Liabilities are measured under normal GAAP.
3. Expected costs to liquidate are accrued.

126

IASB

comes up w/IFRS, but does not have enforcement power (securities regulators). Just like FASB that creates GAAP while the SEC enforces it.

127

IFRS Foundation

1. Parent of IASB, IFRS Advisory Council, an IFRS Interpretation Committee.
2. Appoints members of all three groups.
3. Governed by trustees that serve 3-yr. terms.
4. This is the piece of the IASB actually responsible for setting the standards.

128

IFRS Foundation Monitoring Board

trustees of the IFRS Foundation are accountable to the Monitoring Board

129

IFRS Interpretation Committee

1. Similar to FASB Emerging Task Force.
2. Identifies issues in IFRS that are reviewed by the IASB.

130

IFRS Advisory Council

Advises the IASB on the views of interested organizations.

131

Is IFRS or GAAP more principles-based?

IFRS. As such, with IFRS, there are much fewer rules and more judgment is required.

132

specific IFRS standard for SMEs

1. Removes topics not relevant to SMEs.
2. Simplifies measurement and disclosures.
3. SME standards are the equivalent to GAAP's OCBOA- a simplified accounting framework, but they are not OCBOA.

133

convergence

1. Merging IFRS and GAAP into a single standard.
2. A hypothetical goal; no set timeline for convergence.

134

IASB Framework

similar to FASB's framework
2 same primary characteristics:
1. The only difference is that materiality is added to Relevance.

135

2 assumptions of IASB Framework

1. Accrual accounting is used.
2. Entity is a going concern.

136

What businesses use IFRS for SMEs?

Nonissuers who want to produce general purpose F/S.
1. A lender might require that a company produce financials.

137

Are IFRS for SMEs an OCBOA?

No. But, for qualifying companies, IFRS for SMEs is considered GAAP.

138

Can nonissuers in the U.S. use IFRS for SMEs?

Yes. Some do because it is less costly and complicated than GAAP.

139

Major characteristics of IFRS for SMEs

1. Disclosures for pensions and leases and other areas are simplified.
2. LIFO is not allowed.
3. Goodwill and indefinite life intangible assets are amortized over 10 years.
4. Depreciation is based on a components approach.
5. Reversal of impairment charges IS allowed.
6. No disclosed for EPS.

140

GAAP vs. IFRS- B/S

GAAP: comparative periods not required unless SEC registrant.
IFRS: comparative periods always required

141

GAAP vs. IFRS- I/S

Dividends per share: must be disclosed in IFRS, but not required by GAAP.
Extraordinary G/L: Allowed by GAAP, but not by IFRS.

142

GAAP vs. IFRS- Statement of Changes in Shareholders' Equity

GAAP: changes in equity can be presented in footnotes.
IFRS: must be a separate equity statement.

143

GAAP vs. IFRS- SCI

GAAP: revaluation of PPE through OCI is NOT allowed
IFRS: revaluation of PPE through OCI is allowed

144

GAAP vs. IFRS- SCF

Interest paid: op. or fin under IFRS; only op. under GAAP.
Interest received: op or inv under IFRS; only op under GAAP.
Dividends received: op or fin under IFRS; only op. under GAAP.
Dividends paid: op or fin under IFRS; only fin under GAAP.