Pre-Midterm Flashcards
(187 cards)
1
Q
What’s the difference between US and CAD GAAP?
A
USA = rule based CAD = principal based
2
Q
What are the two acceptable accounting standards under Canadian GAAP?
A
CAD GAAP:
- IFRS
- ASPE
3
Q
What does IFRS stand for?
A
International Financial Reporting Standards
4
Q
What does ASPE stand for?
A
Accounting Standards for Private Enterprise
5
Q
Where is IFRS used?
A
All over the world except the USA
6
Q
Who gets to use ASPE?
A
Private companies.
7
Q
Who has to use IFRS?
A
Publicly traded companies.
8
Q
If a publicly traded company is dual listed in the USA and Canada, which accounting standards do they use and does it matter where their operations are?
A
Doesn’t matter where they’re based if they operate in both countries and are dual listed they can choose either USA GAAP, or IFRS, whichever works best for them and their industry.
9
Q
What are the contents of the financial statements for ASPE?
A
ASPE contents:
- Income Statement
- Statement of Retained Earnings
- Balance Sheet
- Cashflow Statement
10
Q
What are the contents of the financial statements under IFRS?
A
IFRS:
- Statement of Profit and Loss
- Statement of Other Comprehensive Income
- Statement of Changes in Equity (Statement of Shareholder Equity, etc.)
- Statement of Financial Position
- Statement of Cash Flows
11
Q
What else accompanies the financial statements for publicly traded companies?
A
Annual Report:
- Financial Statements
- Management’s Discussion and Analysis
- Notes to the Financial Statements
12
Q
What’s the correct order of preparation for financial statements?
A
- Income Statement/ St. of Profit & Loss & OCI.
- St. of Retained Earnings/St. of Changes in Equity
- Balance Sheet/ St. of Financial Position *& at same time* Statement of Cash Flows/Cash Flow St.
13
Q
What’s in the Income Statement/ St. of Profit & Loss & OCI?
A
Income Statement/St. of Profit & Loss & OCI:
Revenues & Gains
(Expenses & Losses)
_________________
=Net Income
(and for IFRS:)
+ OCI (losses)
_________________
Comprehensive Income (loss)
14
Q
What’s in the Statement of Retained Earnings?
A
Statement of Retained Earnings:
Opening Retained Earnings
+Net Income (loss)
-Dividends Declared
_________________
=Closing Retained Earnings (deficit)
15
Q
What’s in the Statement of Changes in Equity?
A
Statement of Changes in Equity:
Opening Share Capital
+Shares Issued
-Shares Reacquired
________________
=Closing Share Capital
16
Q
What’s on the Balance Sheet?
A
Balance Sheet:
(assets = liabilities + shareholder equity)
a) Cash & Equivalents
+ Current/ Liquid Assets
+ Non-Current/Non-Liquid Assets
____________________
=Total Assets
b)Current Liabilities
+Non-Current Liabilities
____________________
=Total Liabilities
c)Share Capital
+ Retained Earnings
__________________
=Total Shareholder’s Equity
17
Q
What’s in the Statement of Cash Flows?
A
Statement of Cash Flows:
Cash From Operations
+Cash from Investments (cash out)
+Cash from Borrowing
________________
=Net Change in Cash
+ Opening Cash
________________
= Total Cash
18
Q
What’s in the Notes to the Financial Statements?
A
Notes to the Financial Statements:
- summary and reasons for significant accounting practices
- Cross referencing of some details from the statements
- Other things management finds important
19
Q
What’s in the MD&A? (Management Discussion & Analysis)
A
MD&A:
- Recap of year
- Risks faced that year and in the future
- Future prospects
- Details of operating results for the year
20
Q
How do we define an asset?
A
Assets:
- resource currently controlled by the entity
- entity expects future economic benefit from asset
- entity became responsible for the item through a past transaction or event
21
Q
Define “current”.
A
Current:
Will be used up/sold /repaid within 12 months of statement date, or within one operating cycle if those are >12mo.
22
Q
How do we define a liability?
A
Liabilities:
- present obligation of the entity
- responsibility is unavoidable
- entity became responsible through a past event
- must be settled through outflow of otherwise useful resources
23
Q
Share Capital - which number do we use?
A
Share Capital:
- original price when purchased directly from company
- not market value
24
Q
What’s an operating cycle?
A
Operating Cycle:
- the time from purchase of inputs to receipt of payment
25
What does "going concern" mean?
Going Concern:
-company will survive the next 12 months.
26
Which types of businesses can be publicly traded?
Publicly traded:
- Public corporations
- Certain partnerships (USA)
- Certain not-for-profits (USA)
27
What are the types of corporation?
Types of Corp:
- For Profit
- Not For Profit
- Private
- Public
28
What makes not-for-profit reporting different than for-profit reporting?
Not-for-Profit Reporting:
- don't use the terms "profit", "shareholder equity" or "income"
- use terms like "reserves", "excess of revenues over expenses"
29
What are some benefits of a private corp. over a public one?
Private Corp. Benefits:
- Faster decision making
- Lower need for disclosure/transparency
- Less pressure
- Less prone to speculation by shareholders
- Get to use ASPE
- Audited less
30
What are some benefits of public corps. over private ones?
Public Corp. Benefits:
- ability to raise capital by selling shares publicly
- branding
- Can get credit without having to sign personal guarantees/ greater access to credit
- May have access to more talent
31
Why GAAP?
GAAP Because:
* accountability
* auditability
* comparability
* framework
* precedence for field of accounting
* response to fraud that caused The Great Depression
* transparency
32
What's an impairment loss?
Impairment Loss:
- asset that is being written off prior to it being fully depreciated.
- used for bad assets
- often reported on statements during a "big bath"
33
What is treasury stock?
Treasury Stock:
- shares that have been reacquired to give to employees, etc.
34
What is paid-in capital?
Paid-in Capital:
- original purchase revenues from shares being sold by the company
35
How does goodwill work?
Goodwill:
- have to acquire it, can't just create it for the balance sheet
- includes: top talent, customer loyalty, synergies.
36
What does synergy mean?
Synergy:
1+1=3
ie: lower overhead because you can get rid of duplicated departments, vertical integration, etc.
37
What's Fair Value?
Fair Value:
- matches standards
- must be disclosed
38
What kinds of things fall under Accrued Expenses and Other Liabilities
AE&OL:
- generally estimates
- things like outstanding payroll (can't know exact $ for sure in advance)
39
Name some external users of financial statements.
External stmt. users:
-future employees
-customers
-unions
-regulators (TSX/etc.)
-CRA
-shareholders/ investors
-creditors
-credit rating agencies
-competitors and allies
\*these uses fall under Financial Accounting
40
Name some internal users of financial statements
Internal financial stmt. users:
-senior management
-finance
-HR
-marketing
\*generally these uses fall under Managerial Accounting
41
What are the 2 fundamental qualitative characteristics of financial statements?
Fundamental Qualitative Characteristics:
- Relevance
- Faithful Representation
42
Which qualities make something relevant?
Relevance:
- Materiality
- Confirmatory / Predictive value
43
Which qualities make something faithfully represented?
Faithful Representation:
- Complete
- Neutral
- Free from (material) errors
- Process is disclosed
44
What are the enhancing qualitative characteristics of financial statements?
Enhancing Qualitative Characteristics:
* Comparable
* Verifiable
* Understandable
* Timely
45
What are the basic things that people examining the financial statements are looking to ascertain?
Financial statements should tell us:
- how well the entity is doing economically
- $ owed
- $ available to pay out liabilities
- resource management quality
46
What's Cash Basis accounting?
Cash Basis:
- revenue recognized when it's received
- expenses recognized when they're paid
- this is only allowed for farms and fisheries under CAD GAAP
47
What's the Accrual Basis of accounting?
Accrual Basis:
- revenues recognized when earned
- expenses recognized when incurred
- this is acceptable under GAAP
48
How do we show gift cards redemption on the financial statements?
Gift Card Redemption by Customers:
- decreases liabilities
49
How do we show prepaid expenses on the financial statements?
Prepaid Expenses:
- increase assets of the business that paid
50
What does management bias tend to do to share price?
Management Bias:
- too few report $0/share
- too few 4s reported (because they get rounded down)
51
What's a good estimator of materiality?
Materiality:
\>5% Net Income
52
What is the economic benefit of prepaid insurance?
The economic benefit of prepaid expenses in general is the fact that they're prepaid.
53
How do we prepare financial statements if a company is not a going concern?
If a company isn't a going concern, we prepare everything as current, and all at liquidation value.
54
In the last year of an asset's useful life, is it current or non-current?
In the last year of an asset's useful life it still does not become current if it wasn't originally, unless there is guaranteed disposal for $$ in place.
55
What often accompanies non-current assets (on the other side of the accounting equation)?
Generally non-current assets are accompanied by non-current liabilities.
56
What's the definition of equity?
The definition of equity is actually just
assets - liabilities = equity
57
What's the template approach to accounting?
Template:
Assets = Liabilities + Shareholder Equity
- a number of accounts under each one
- template has a number of standard accounts on it
- basically like a bunch of journal entries
- each line must balance
- every R.E. entry has an R, E, or DD to explain it in a final column
58
In the template approach, what do R, E, and DD in the final column mean?
Template Approach-
Retained Earnings Explanations:
R = Revenue
E = Expense
DD = Dividends Declared
\*these are all temporary accounts
59
Does issuing shares affect Revenue?
Issuing shares does not affect revenue.
60
How does issuing shares get entered?
Issuing shares:
^ Cash
^ Common Shares
61
When do we record loan interest?
We record loan interest when it gets paid.
62
When something affects cash and we can't figure out what else it affects, what's a solid bet?
When something affects cash and we can't figure out what else, Retained Earnings are a solid bet.
63
How does buying equipment affect our journal entries?
Buying equipment:
v Cash (Asset)
^ Equipment (Asset)
64
How does selling goods get entered?
Selling goods:
^ Cash/ ^ Accounts Receivable
^ Revenue (Retained Earnings - S.E.)
v Inventory
^ COGS (= ^ Expenses = v Retained Earnings)
65
How do we show that some prepaid insurance is being depreciated?
Depreciating Prepaid Insurance:
v Prepaid Insurance
(CR Prepaid Insurance)
^ Expense (= v Retained Earnings = v S.E.)
(DR Insurance Expense)
66
How do we show that interest has been accrued on a loan?
Interest on a loan:
^ Liabilities
(CR Interest Payable)
^ Expenses (=v S.E.)
(DR Interest Expense)
67
What are some limitations of the template approach?
Limitations of the template approach:
- have to limit the number of accounts
- b/c ^ limited data mining for management
68
Are the following generally net inflows or outflows?
- Cash from Operations
- Cash from Investing
- Cash from Financing
Generally:
- Cash from Operations - net inflow
- Cash from Investing - net outflow
- Cash from Financing - net inflow
69
Who's the father of accounting?
Luca Pacioli is the father of accounting.
70
In what year was double entry accounting invented?
Double entry accounting was invented by Luca Pacioli in 1494.
71
Do the following accounts normally have a debit or credit balance?
- Assets
- Liabilities
- Shareholder Equity
Normal balances:
- Assets =\> Dr. balance
- Liabilities =\> Cr. balance
- Shareholder Equity =\> Cr. balance
\*the normal balance is whichever Dr/Cr increases the account.
72
Do the following accounts normally have a debit or credit balance?
- Revenue
- Expense
- Dividends Declared
Normal balances:
Revenue =\> CR balance
Expenses =\> DR balance
Dividends Declared =\> DR balance
\*the normal balance is whichever (DR/ CR) increases the account
73
What do we need to know in order to assess depreciation on an asset?
To assess depreciation we need to know:
- the pattern in which the economic benefit is consumed
- the asset's cost
- estimated residual market value at the end of it's life
- length of estimated useful life
74
How do we show depreciation?
We show depreciation as follows:
v Equipment (Asset)
(CR Accumulated Depreciation contra asset account)
^ Expenses (= v R.E. = v S.E.)
(DR Depreciation Expense - Contra R.E. acct.)
75
What are the steps in the accounting cycle?
Steps in the accounting cycle:
1. Analyze transactions & events.
2. Journalize same.
3. Post journal entries to ledger.
4. Unadjusted trial balance.
5. Adjusting journal entries.
6. Adjusted trial balance.
7. Financial statements.
8. Closing journal entries.
9. Post-closing trial balance.
76
What does a basic journal entry look like?
Basic Journal Entry:
- 3 -4 columns: date &/or entry #, DR/CR (name of account), amount (might have separate columns for DR vs CR amounts)
- CRs are indented (all three columns)
77
What's the acronym to remember what's affected by debits?
Dividends
Expenses
bASSET hound
Increase
T
78
What's the acronym to remember which accounts are increased by credits?
C-R-E-D-I-T
C
Revenue
Equity
Debts (= liabilities)
Increase
T
79
What does the General Ledger look like?
- summary of Journal
- T accounts
- DR on left, CR on right
80
What does the General Ledger do?
The General Ledger allows us to find the closing balance of each account (DR-CR)
81
What should the normal balance be for each account?
The closing balance should be whichever increases the account.
82
What are some mistakes that a Trial Balance might miss?
Some things that the trial balance could miss include:
- DR/CR correct but in wrong accounts
- Same incorrect amount in both the DR and the CR
- Complete omission of a journal entry
83
What are the three tricks to use if your trial balance doesn't balance?
If the Trial Balance doesn't balance, try:
Total DR - Total CR = X
- find X in the entries
- X/2 --\> was DR/CR of this amount swapped?
- X/9 --\> if this divides evenly, there's a transposition error.
84
What are considered gains / losses?
Things that are abnormal, like selling off old furniture after an office move.
85
How do we know a transaction / event has occurred?
A transaction/event has occured if:
* Meets the definition of an element of the financial statements
* Measurable
* Settlement is probable
86
What are the two types of adjusting entries?
The two types of adjusting entries are:
Accruals
Deferrals
87
What is an accrual (adjusting entry)?
Accruals:
Recognizing an event before the cash changes hands.
88
What is a deferral (adjusting entries)?
Deferrals:
Recognizing an event after payment occurs.
e.g. using up prepaid insurance
89
At what stage of the accounting process do we recognize depreciation?
We recognize depreciation in Step 5: Adjusting Journal Entries.
90
How would we show that we are using up some unearned revenue? (i.e. we have now earned some of it)
Using up unearned revenue:
DR Unearned Revenue
CR Sales Revenue
91
How do we adjust for wages left owing at period end?
Wages outstanding:
DR Wages Expense
CR Wages Payable
92
How do we adjust for an entity being owed interest on a loan it advanced to someone?
Outstanding interest owed TO the entity:
DR Interest Receivable
CR Interest Revenue
93
How do we adjust for depreciation?
Adjusting for depreciation:
DR Depreciation Expense
CR Accumulated Depreciation
(both are contra accounts)
94
How do we adjust for outstanding interest on a loan the entity took out from somewhere else?
Adjusting for interest the entity owes:
DR Interest Expense
CR Interest Payable
95
Do we use the cash account for adjusting entries?
NEVER use the Cash account for adjusting entries.
96
What kind of transaction triggers an adjusting entry?
There often is no transaction to trigger adjusting entries... we have to keep track of what needs to be adjusted each period.
97
Why do we do adjusting entries?
Adjusting entries
- enhance comparability
- tie expenses and incomes to the correct period
98
When are adjusting entries done?
Adjusting entries are done at the end of the period.
99
Which two account types are always involved in adjusting entries?
Adjusting entries always involve:
- one Statement of Financial Position/Balance Sheet account
- one Statement of Profit and Loss/ Income Statment account
100
How do we simplify the accounts for Step 7: Financial Statements?
When we generate the financial statments, we group similar accounts together from the Adjusted Trial Balance, and we show assets net of their depreciation (starting and accumulated depreciation values go into the Notes).
101
When in an accounting period are closing entries done?
Closing entries are done at the end of the period.
102
What do we close in Step 8: Closing Entries?
In Step 8: Closing Entries, we
- close/reset all temporary accounts to zero
- bring Retained Earnings up to date by zero-ing Net Income and Dividends Declared
103
What are the entries we use to close the temporary accounts?
To close the temporary accounts:
- DR Revenue accounts, CR Income Summary
- DR Income Summary, CR all Expense accounts
- DR Income Summary, CR Retained Earnings
- DR Retained Earnings, CR Dividends Declared
104
Is a revenue a DR or CR for the Income Summary account?
Revenue is a CR for the Income Summary account.
105
When is the Income Summary account opened and closed?
The Income Summary account is opened and closed on the last day of the fiscal year.
106
What does the Income Summary account determine?
The Income Summary account determines net income.
107
What does the Income Summary account get closed to?
The Income Summary account gets closed to Retained Earnings.
108
What do Revenue accounts get closed to?
Revenue accounts get closed to the Income Summary account.
109
What do Expense accounts get closed to?
Expense accounts get closed to the Income Summary account.
110
What does the Dividends Declared account get closed to?
Dividends Declared gets closed to Retained Earnings.
111
What happens in Step 9: Post-Closing Trial Balance?
Post-Closing Trial Balance:
- makes sure temporary accounts have been zeroed
- makes sure closing Retained Earnings matches the Statement of Retained Earnings / Statement of Changes in Equity
112
What do we do if we have a negative balance in an account?
If we have a negative balance in an account, we need to zero that account and move the negative over to an opposite account.
113
What's the definition of revenue?
An inflow of economic benefits that arises from ordinary business activities.
114
How is revenue evaluated? (two words)
Revenue is evaluated by:
Quantity
Quality
115
What are we looking for when we look at the quantity of revenue a business generates?
When we look at revenue quantity:
- Overall amount
- Trends
116
What factors make up revenue quality?
Factors in revenue quality:
* What's driving the revenues
* Are cash flow and net income moving together?
117
When we talk about revenue quality, and cash flow/net income, what are the three things we may see and what do they mean?
Cash flow's movement with net income:
* Cash Flow from Operations \> Net Income = high quality
* Cash Flow from Ops \< Net Income = low quality
* CFO & NI not moving together = low quality
118
Does ASPE use earnings- based or contract based revenue recognition?
ASPE uses earnings based revenue recognition.
119
Does IFRS use earnings based or contract based revenue recognition?
IFRS uses contract based revenue recognition.
120
When is revenue recognized under earnings-based revenue recognition?
Earnings based revenue recognition:
* Performance is achieved
* Consideration is reasonably assured to be:
* Measurable
* Collectable
121
When can we say that goods have been sold?
Goods have been sold when:
* significant risks and rewards of ownership are transferred
* No significant acts left to perform
* Seller not managing goods anymore
122
When looking at long term contracts, what are the two main ways to recognize revenue from them?
Long term contracts & revenue recognition:
* % of completion method
* completed contract method
123
When looking at a long term contract with multiple parts, how do we recognize revenue?
For long term contracts with multiple parts & revenue recognition, use the % of completion method.
124
How do we recognize revenue for long term contracts with a single part under earnings-based revenue recognition?
Under earnings based revenue recognition on a single performance long term contract, we use the completed contract method.
125
What makes consideration measurable?
Consideration is measurable when:
* price must be fixed/determinable
126
What makes consideration collectable?
Consideration is considered collectable when:
* customer has the intention to pay
* customer has the ability to pay
127
What is the acronym for revenue recognition?
The acronym for revenue recognition is RCMP:
R - recognize
C - Collectable
M - Measurable
P - Performance Achieved
128
Who uses the contract based approach to revenue recognition?
IFRS and USA GAAP use the contract based approach to revenue recognition.
129
What is the definition of a contract?
A contract is:
* an agreement between 2+ parties that creates a combination of rights and requirements
130
Does a contract have to be written to be recognized?
A contract can be:
* Oral
* Written
* Implied by ordinary business practices
131
Is a contract an asset or a liability?
A contract is:
* an asset if rights\> obligations
* a liability if obligations \> rights
132
When do we recognize revenue under the contract based approach?
Under the contract based approach, we recognize revenue when there is a(n):
* increase in contract assets/rights
* decrease in contract liabilities/performance obligations
133
What do our journal entries look like when an entity provides goods/services under a contract, on account?
Goods or services provided on account:
DR Accounts Receivable
CR Sales/Service Revenue
for sale of goods:
DR COGS
CR Inventory
134
What does the journal entry look like when a company sends an invoice?
We do not make a journal entry when a company sends an invoice.
135
What does our journal entry look like when a customer pays down their account?
When a customer pays down their account:
DR Cash
CR Accounts Receivable
136
Why is the Contract Based Approach considered to be better than the Earnings Based Approach to revenue recognition?
Contract based approach is considered superior because it's easier to identify a contract than it is to decide when a revenue should be recognized.
137
What are the five steps to the Contract Based Approach to revenue recognition?
The five steps to the Contract Based Approach:
1. ID contract.
2. ID separate performance obligations.
3. Determine overall transaction price.
4. Allocate transaction price to separate performance obligations.
5. Recognize revenue as the performance obligations are met.
138
How do we identify a contract?
ID a contract:
* Exists
* Enforceable
* Explicit (Rights/Restrictions/ Performance Obligations ID'd)
* Commercial substance
* Collectable
139
What do we mean when we say something has commercial substance?
Something has commercial substance when future cash flows will be altered in any of the following ways:
* risk
* timing
* amount
140
How do we identify the separate performance obligations in a contract?
ID separate p.o.s:
* Distinct goods or services
* Customer can benefit from the discrete unit
* Unit is separable from other parts of the contract
141
When should we not separate out performance obligations from a contract?
We don't separate p.o.s when it doesn't increase faithful representation.
142
When we determine overall transaction price of a contract, are taxes and rebates/ coupons included?
When determining overall transaction price of a contract:
* Taxes are NOT included
* Rebates, coupons, incentives, etc. MUST be included
143
What are the methods for allocating transaction price to parts of a contract?
We allocate transaction price to separate performance obligations by either:
* Percentage of Completion
* Completed Contract
144
What are some key indicators that control of goods or services has been transfered?
Clues that control of goods or services has been transferred when the customer has:
* Physical possession
* Legal title
* Risks and rewards of ownership
* Accepted the goods/services
* Obligation to pay
145
How do we do the journal entry if the entity is paid at the start of the month for services at the end of the month?
Paid at start of month for end of month services:
DR Cash, CR Unearned Revenue
then when obligation performed:
DR Unearned Revenue, CR Service Revenue
146
What are some complications with revenue recognition?
Complications with revenue recognition:
* Channel stuffing
* Multi-element arrangements
* Long term contracts
* Principal-agent arrangements
* Breakage
* Rights of return
* Warranties
* Gift card liability
* Customer loyalty provision
147
What is channel stuffing and how is it done?
Channel stuffing is moving profits into the current reporting period by over-providing product to distribution channels around period end. Done by offering discounts, extending credit terms, offering greater right of return (and not properly estimating increased return percentage)
148
Is channel stuffing illegal?
Channel stuffing is not illegal if everything is:
* properly accounted for
* disclosed fully
149
How can channel stuffing be a detriment to the company doing it?
Channel stuffing is bad for the entity because it eats up the next period's profits.
150
What is a multi-element arrangement?
A multi-element arrangement is when products and services are bundled together at a discounted price. Generally different parts of the bundle earn revenue at different times.
151
How do we recognize the revenue from multi-element arrangements?
To recognize the revenue from multi-element arrangements:
* apply criteria separately to each part
* component value = (item stand-alone price/all combined stand alone prices)\*bundle price
152
Describe long-term contracts.
A long term contract is where we have several performance obligations achieved in stages.
153
What are the ways we can recognize revenue in a long-term contract?
To recognize revenue in a long-term contract:
* Percentage of Completion
* Output
* Input
* Completed Contract
154
What is the Percentage of Completion, Input method of recognizing revenue?
Percentage of Completion, Input method of recognizing revenue is:
- based on the costs and efforts expended.
- for long term contracts
155
What is the Percentage of Completion, Output method?
Percentage of Completion, Output method is:
- based on the results achieved under the contract.
- for long term contracts
156
What is the Completed Contract method of revenue recognition?
The completed contract method of revenue recognition:
* for long-term contracts
* OK with ASPE but not IFRS
* revenues and expenses are deferred until contract completion.
157
What are Principal-Agent Arrangements?
Principal-Agent Arrangements:
* Sale is facilitated by a third party (Agent)
* Principal actually provides the goods/services
* Agent receives consideration
* Principal establishes price
* Agent has no inventory risk
*
158
What is the Right of Return?
Right of Return:
* Purchaser (generally a distributor or retailer) has the right to return unsold product for a refund.
159
How do we record a sale with the Right of Return?
Recording a sale with Right of Return:
* Delivery Date:
* DR AR, CR Refund Liability (estimate), CR Sales Rev.
* DR COGS, CR Inv.
* Payment Date:
* DR $, CR AR
* Return Date:
* DR Ref. Liab., CR $
160
What are the two kinds of warranties?
Two kinds of warranties:
* Assurance Warranty
* Service Warranty
161
What is an Assurance Warranty?
Assurance Warranty:
* included for “free”
* not a separate performance obligation
162
What is a service warranty?
Service Warranty:
* Paid for separately
* Separate performance obligation
163
What are the entries to recognize revenue in transactions with retainers, advance payments, etc.?
Unearned Revenue recognition:
* Prepayment Date:
* DR Cash, CR Unearned Revenue
* Performance Date:
* DR Unearned Revenue, CR Sales/Service Revenue
164
How do we recognize revenue with gift cards?
Gift Cards:
* Sale of card:
* DR Cash, CR Unearned Revenue
* Redemption:
* DR Unearned Revenue, CR Sales / Service Revenue
* DR COGS, CR Inventory
165
What is Breakage?
Breakage is the portion of gift cards that will never get used. Has to be estimated based on at least 3 years experience.
166
What is the standard estimate for breakage?
Breakage is generally estimated at between 10% - 15%.
167
How do we calculate the dollar value of breakage to recognize?
Breakage $ value:
= (value redeemed that period-total outstanding value)\*%breakage
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What does the word Provision indicate?
Provision:
* significant degree of estimation
* uncertainty in timing of settlement
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What kinds of things fall under the Customer Loyalty Provision heading?
Customer Loyalty Provision:
* generally points-based programs
* can be company-specific or third party (Air Miles)
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How do we recognize revenues surrounding company-specific Customer Loyalty Provisions?
Company-specific Customer Loyalty Provision:
* Separate performance obligation
* portion of transaction price allocated to points
* Stand-alone price of points = stand-alone price of reward\*% chance of use
* Point redemption moves $ from liability to asset
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How do we recognize revenues with third party customer loyalty programs?
3rd party customer loyalty programs:
* Points are a separate performance obligation
* Portion of transaction price allocated to points
* Standalone price of points = entity's cost of purchasing them + commission
* Performance obligation satisfied when entity purchases the points.
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When should we recognize an expense?
We recognize expenses when the economic benefits are consumed.
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What do expenses become when the consumption of their economic benefit is deferred?
If consumption is deferred, we get an asset until we can recognize the expense.
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What is the matching principal?
Matching Principal:
Recognizing expenses at the same time as the revenues they generate.
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What are the two ways to prepare an Income Statement / Statement of Profit and Loss?
2 ways to do Income Statement/ Statement of Profit and Loss:
1. Single Step
2. Multi Step
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How do we create a single step Income Statement/ SofP&L?
Single step Income Statement/ St. of P & L:
* all revenues
* _- expenses including tax_
* NI
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What are the steps in a multi-step Income St. / St. of P & L?
Multi-step Income St. / St. of P & L:
1. Sales Revenue
2. Gross Profit/ Gross Margin
3. Profit from Operations
4. Profit Before Income Tax
5. Net Income (Loss)
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How do we calculate gross profit/ gross margin?
Gross profit/ gross margin =
Sales Revenue - COGS
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How do we find the Gross Profit Margin Percentage?
Gross Profit Margin Percentage =
Gross Profit / Net Sales Revenue
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How do we find Profit from Operations / Operating Income?
Profit from Operations/ Operating Income =
Gross Profit - Operating Expenses
or for service companies:
Revenues - Operating Expenses
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What are operating expenses?
Operating expenses:
* ads
* depreciation
* rent
* wages
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How do we find Profit Before Income Tax?
Profit Before Income Tax =
Profit from non-operating activities
+
Profit from Operations
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What's the final step of a multi-step St. of Income/ P & L?
Final step:
Net Income =
Profit Before Income Tax - Income Tax
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What are the two ways of presenting expenses?
Expenses can be presented by:
* Function
* Nature
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What do we mean by grouping expenses by function?
Grouping expenses by function:
* eg. Cost of Sales, Admin, Distribution
* \*GAAP: notes have to contain info on the nature of expenses
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How do we decide how to present expenses in the financial statements?
We must adhere to the fundamental qualitative characteristic of Relevance to decide whether to group expenses by function or nature.
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How do we find Total Comprehensive Income?
Total Comprehensive Income =
Net Income + Other Comprehensive Income
