1 - Financial Reporting Flashcards
An entity’s revenue may result from:
According to the FASB conceptual framework, an entity’s revenue may result from a decrease in a liability from primary operations.
Special-purpose framework
Financial statements may be prepared using a comprehensive basis of accounting other than generally accepted accounting principles (often referred to as a special purpose framework). Examples given by AU-C 800.07 are as follows:
1. Cash basis
2. Tax basis
3. Regulatory basis
4. Contractual basis
5. Other basis
One purpose of DuPont analysis
Allows the companies to examine the profit margin and investment turnover components of a company’s return on investment.
The DuPont equation breaks ROA down to the profit margin showing the effective control of cost (Net income/Net sales) and the asset turnover showing the efficient use of assets (Net sales/Average total assets).
Interim financial statements can be described as emphasizing
Timeliness over faithful representation.
“Interim financial information is essential to provide investors and others with timely information as to the progress of the enterprise.”
Price multiple ratios
Price multiples are based on the assumption that management is able to manipulate or influence the components of the price multiple ratios, including future earnings, future growth rates, future sales, future cash flows, and trends of these amounts over time.
Comprehensive basis of accounting, other than GAAP
a. Cash Basis
b. Tax basis
c. Regulatory basis
d. Contractual basis
e. Other basis that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements.
Current ratio and Quick ratio disparity
Normally, these two ratios differ because current assets include merchandise inventory, but it is not included in quick assets. So, if these two ratios differ significantly, it is likely that the difference can be traced to an unusually high level of merchandise inventory.
Price to earning vs Earnings Yield vs Dividen Yield
Price-to-earning: Market price per share/Earning Per Share.
Earnings Yield: Earning Per Share/Market price per Share.
Dividen Yield: Dividends per share/Market price per share
Potencial financial line item additional disclosures
a. For assets: Nature, quality and location; future cash flows; relation to other line items; and significant contractual.
b. For assets and liabilities resulting from financial instruments or other contracts: contractual or legal terms (e.g., timing of receipts and disbursements), degree of credit or nonperformance risk, potential effect related to inability to pay or perform, and method used to determine the cash flows.
c. Other disclosures could include equity instrument terms or conditions, potential effects of changing accounting methods, breakdown of aggregated line items, alternative measurements, and the line item’s relation to other line items.
Operation vs strategic Planning
Operational planning results in budget data to be used in planning day-to-day operations.
Strategic planning is performed only at the highest level of management and focuses on long-range goals.
ROE
Basic Formula: ROE=Net Income/Shareholders equity
Dupont Analysis: ROE=(Net Income/Revenue)x(Revenue/Total Assets)x(Total Assets/Shareholders Equity)
Return con Common Equity: ROCE= (Net Income-Preferred Dividends)/Avrg Common Stock equity
Changes in account estimates
Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate.
Risks and Uncertainties. The primary subject discussed in this topic is:
Disclosure.
One of the purposes of financial statements is to provide information to help users predict the reporting entity’s future cash flows and results of operations. This assessment depends, to some degree, on the users’ knowledge and assessment of the risks and uncertainties involving the entity’s operations. Disclosure of these risks and uncertainties is a critical component of the user’s process of evaluating these variables. FASB ASC 275-10 addresses the disclosures required to facilitate a user’s evaluation of an entity’s risks and uncertainties.
The lowest ending inventory when some product lines are subject to specific price increases
When prices are rising, a LIFO inventory method will produce a lower ending inventory than other inventory methods because the cost of ending inventory consists of older lower cost items. The dollar-value LIFO method does this using layers priced using specific price indexes for years in which layers are added.
the investor discontinued the application of the equity method
When the investor’s share of net income equals its share of net losses that were not recognized during the equity-method suspension period
When the investee returns to profitability, the investor should resume applying the equity method.
valuation allowances in accounting for income taxes
The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.
using the composite depreciation method
When applying group or composite depreciation methods, when one sells an asset, the cost of the asset is removed, and the accumulated depreciation is assumed to be equal to the difference between cash received and cost.
Tax Position
a. “A decision not to file a tax return
b. “An allocation or a shift of income between jurisdictions
c. “The characterization of income or a decision to exclude reporting taxable income in a tax return
d. “A decision to classify a transaction, entity, or other position in a tax return as tax exempt
e. “An entity’s status, including its status as a pass-through entity or a tax-exempt not-for-profit entity.”
Lease Contract
A contract that is with another lessee for use of a specified property being leased by the lessee
Under FASB ASC 842, a lease is defined as a contract in which the lessor conveys the right to control the use of an identified asset to the lessee for a period in exchange for consideration. In this case, the contract specifically identifies the property being leased, indicating that it is a lease.
The FASB’s fair value hierarchy
- Level 1 inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date
- Level 2 inputs—inputs other than quoted prices included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly
- Level 3 inputs—unobservable inputs for the asset or liability
Enhancing Qualitative Characteristics
- Comparability
- Verifiability
- Timeliness
- Understandability
Fundamental Qualitative Characteristics
A. Relevance
1. Predictive Value
2. Confirmatory Value
3. Materiality
B. Faithful Representation
1. Completeness
2. Neutrality
3. Freedom from error
