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CPA - FAR > 1 - Conceptual Framework > Flashcards

1 - Conceptual Framework Flashcards

1
Q

What is the most authoritative set of accounting pronouncements?

A

The FASB Codification

All pronouncements fall under the Codification umbrella

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2
Q

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

A

Authoritative and Non-Authoritative

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3
Q

What is the focus of financial reports for individual companies?

A

Focus is on the needs of users to help them make decisions and assessments about the company

Does not make assessments of the economy

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4
Q

What is the Primary Constraint of Financial Reporting?

A

Cost vs. Benefit

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5
Q

What are the Qualitative Characteristics of Financial Reporting?

A

Relevance and 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 without bias
Free from Error - No material errors or omissions

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6
Q

What are the Enhancing Qualitative Characteristics of Financial Reporting?

A

Comparability Understandability Timeliness and Verifiability

Comparability - Allows users to compare different items among various periods
Understandability - Classify, characteriz and present info clearly
Timeliness - Information is made available early enough to impact the decision making of users
Verifiability - Different people would reach a similar conclusion on the information presented

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7
Q

How does Conservatism affect the recording of accounting transactions?

A

When an estimate is necessary due to uncertainty, conservatism chooses the best option that won’t overstate the financial position of the company

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8
Q

What is an accrual?

A

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

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9
Q

What is a deferral?

A

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

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10
Q

When to recognize a F/S element and how to measure?

A

Meets definition of an element (asset/liability)

Capable of being measured (monetary)

Item is relevant and faithful representation (useful)

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11
Q

Describe fair value with respect to an asset

A

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

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12
Q

What market assumptions are made in a fair value assessment?

A

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

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13
Q

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

A

Most reliable-Observable data.

Ex. NYSE or NASDAQ

Price quotes or market prices for IDENTICAL assets/liabilities

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14
Q

What items are included in a Level 2 valuation input?

A

Observable data

Transactions did not occur in active market or

Transactions relate to SIMILAR assets/liabilities

Ex. Interest rates, Prime rate

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15
Q

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

A

Least reliable:

Unobservable inputs- management assumptions or forecasts

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16
Q

What are acceptable valuation techniques for fair value?

A

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

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17
Q

What are current assets?

A

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

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18
Q

What are current liabilities?

A

Liabilities that will use current assets during the present operating cycle

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19
Q

What is an accrued liability?

A

Expense that has been incurred but not paid

Example: rents payable

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20
Q

What is a deferred revenue?

A

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

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21
Q

When are revenues recognized?

A

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

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22
Q

What is a gain?

A

Increase in equity from an activity or event that is not central to the main activities of the business
(Incidental Transaction)

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23
Q

What is a loss?

A

Decrease in equity from an activity or event that is not central to the main activities of the business
(Incidental Transaction)

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24
Q

What is an operating cycle?

A

Average time it takes to turn materials or services into Cash

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25
Q

What is the present value of future cash flows?

A

Valuation method - the current value of a future amount of money using a specific interest rate

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26
Q

What is historical cost?

A

Original Price - (net of depreciation and amortization)

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27
Q

What is replacement cost?

A

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

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28
Q

What is a market cost (FMV)?

A

The sale price of an asset (Exit Cost)

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29
Q

What is Net Realizable Value?

A

Sale Price of an Asset - Selling/Disposal Fee

30
Q

When is revenue recognized in an installment sale?

A

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

31
Q

What is deferred gross profit?

A

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

32
Q

What is the cost recovery method?

A

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

33
Q

What is subscription revenue? How is it recorded?

A

Payment has been received but performance is not complete.

As company performs revenue is recognized.

Recorded as a Deferred Revenue (Liability) on Balance Sheet

34
Q

How are franchise revenues recorded?

A

Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized

35
Q

How do you calculate sales revenue starting from cash basis income?

A

Mnemonic: SPEAR-BAR

Sales (i.e. Customer Payments)+ Ending Accounts Receivable- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis

36
Q

How do you calculate COGS starting from Cash Basis?

A

Mnemonic: CRAP-I

Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis

37
Q

When are expenses recognized?

A

When they are incurred. Accrue if not yet paid.

38
Q

What are accrued expenses?

A

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

39
Q

What are the major components of Comprehensive Income?

A

Net Income + Other Comprehensive Income (OCI-DENT)

40
Q

What is the purpose of a reclassification adjustment?

A

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

41
Q

Where is Comprehensive Income reported?

A

Reported in a Single or Combined Income Statement

42
Q

What disclosures on accounting policies are required in financial statements?

A

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

43
Q

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

A

Nature of Operations

Use of Estimates

Certain Significant Estimates

Concentration vulnerability

44
Q

Under Cash Basis Accounting how are Revenue and Expenses recognized?

A

Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow

45
Q

Is Cash Basis Accounting ok for Tax Returns?

A

Yes

46
Q

Is Cash Basis Accounting GAAP?

A

No - GAAP uses Accrual Accounting

47
Q

What is an advantage of Modified Cash Basis Accounting?

A

It avoids the complexities of GAAP but provides more information than Cash Basis Accounting

48
Q

Is Modified Cash Basis GAAP?

A

No - GAAP uses Accrual Accounting

49
Q

What are the 3 acceptable options for Income Tax Basis Accounting

A

Cash Basis - Accrual Basis - Hybrid Method

50
Q

What are the advantages of the Small and Medium Sized Entity Framework?

A

It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)

51
Q

What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?

A

Deferred Taxes Method and Taxes Payable Method

52
Q

What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?

A

Expensed or Amortized (15 years)

53
Q

How is Goodwill treated under the Small and Medium Sized Entity Framework?

A

Amortized (15 years)

54
Q

What are the required liquidation basis financial statements?

A

Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation

55
Q

What is the key benefit of the accounting rules for Development Stage Entities?

A

Cost savings without sacrificing financial statement usefulness

56
Q

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

A

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

57
Q

What is a Development Stage Entity?

A

A company that is still in the formation stage and hasn’t yet begun principal operations or produced significant revenue

64
Q

When is interest not expensed?

A

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

65
Q

What is constant dollar accounting?

A

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

Uses the Consumer Price Index (CPI)

66
Q

What are the 3 basic elements?

A

Assets-Economic resource that has a probable future benefit, one can obtain the benefit, and the transaction creating benefit has already occurred

Liabilities-Economic obligation in which one needs to use or transfer an asset, it can’t be avoided and transaction already occurred

Equity or Net Assets-assets left over after deducting liabilities

67
Q

Equity consists of what 3 elements?

A

Contributions/Investments by owners

Distributions to Owners

Comprehensive income-
Derivative Cash Flow Hedges

Excess adjustment of Pension PBO and FV of plan assets at Year End

Net unrealized gains/losses on AFS securities

Translation adjustments for foreign currency

68
Q 
Capital Maintenance
(What are the 2 concepts?)
A

Physical Capital (NET INCOME) -Only recognize an event when an asset is sold or liability is settled (price change measured in nominal or constant dollars)

Financial Capital (COMPREHENSIVE INCOME) - Recognize an event as a change in value of asset/liability occurs (recognize holding gains/losses)

69
Q

How does managerial accounting differ from financial accounting?

A

Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP

69
Q

When is royalty income recognized? How is it recognized?

A

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

69
Q

How are discontinued operations reported? When are they used?

A

Reported Net of Tax after Continuing Operations

Company decides to cease operating a segment of its business (represents a strategic shift and has major effect on operations and financials)

Includes Income (or loss) from the period plus the gain (or loss) from disposal

69
Q

For discontinued operations, what are the three requirements for disposal assets?

A

They must be Held for Sale - Sold - or Disposed of another way

69
Q

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

A

Immediately.

69
Q

What major items should be classified under General Administrative expenses?

A

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

69
Q

What are business start-up costs?

A

One-time costs for opening a new business

Expensed as they are incurred

69
Q

What is present Value?

A

Discounted cash flows due to time value of money

CPA - FAR (18 decks)

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