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FAR to proof > 1.1 Financial Accounting Standards COPY > Flashcards

1.1 Financial Accounting Standards COPY Flashcards

1
Q

Define Recognition.

A

A recognized item is recorded in an account and ultimately affects the financial statements.

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2
Q

What was the Wheat Committee responsible for?

A

The formation of FASB

1971 - prior was AICPA

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3
Q

What steps does FASB take to issue a new accounting standard?

A
  1. Considers whether to add a project to its agenda (with FAF)
  2. Conducts research on the topic and issues a Discussion Memorandum detailing the issues surrounding the topic;
  3. Holds public hearings on the topic;
  4. Evaluates the research and comments from interested parties and issues an Exposure Draft - the initial accounting standard;
  5. Solicits additional comments, modifies the Exposure Draft if needed;
  6. Finalizes the new accounting guidance and approves with a majority vote
  7. Issues an Accounting Standards Update (ASU).
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4
Q

How are Property, Plant and Equipment and Intangibles valued?

A

Historical Cost and Depreciated/Amortized Historical Cost

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5
Q

How are Receivables valued?

A

Net Realizable Value

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6
Q

How is inventory valued?

A

Lower of Cost or Market

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7
Q

Can an investment in a subsidiary to be consolidated be measured at fair value?

A

No

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8
Q

How is the fair value of an asset and liability determined? (Entry or Exit Price)

A

Asset: Exit Price, Liability: Exit Price

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9
Q

How is an investment in Marketable Secuirties measured?

A

Market Value

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10
Q

How is a liability measured?

A

Present value

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11
Q

How is Owners Equity valued?

A

Historical Value of Cash Inflows and residual valuation

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12
Q

What are the 2 primary qualitative characteristics?

A

Relevance and faithful representation

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13
Q

Name the three parts that make up Relevance.

A

Predictive value, confirmatory value and materiality

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14
Q

Name the three items that make up Faithful Representation.

A

Completeness, Neutrality and Free from Error

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15
Q

Name the 4 Enhancing Qualitative Characteristics

A
  1. Comparability
  2. Verifiability
  3. Timeliness
  4. Understandability
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16
Q

Define Relevance

A

Information is relevant if it makes a difference to decision makers in their role as capital providers.

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17
Q

Define Predictive Value

A

Information has predictive value if it assists capital providers in forming expectations about future events.

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18
Q

Define Confirmatory Value

A

Information has confirmatory value if it confirms or changes past (or present) expectations based on previous evaluations.

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19
Q

Define Materiality

A

impacts user’s decision

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20
Q

Define Faithful Representation

A

Information faithfully represents an economic condition or situation when the reported measure and the condition or situation are in agreement

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21
Q

Define Completeness

A

information is complete if it includes all data necessary to be faithfully representative.

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22
Q

Define Neutral

A

information is neutral when it is free from any bias intended to attain a prespecified result, or to encourage or discourage certain behavior.

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23
Q

Define free from error

A

information is free from error if there are no omissions or errors.

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24
Q

Define Comparability

A

The quality of information that enables users to identify similarities and differences between sets of information.

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25
Q

Define Verifiability

A

Information is verifiable if different knowledgeable and independent observers could reach similar conclusions based on the information.

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26
Q

Define Timeliness

A

Information is timely if it is received in time to make a difference to the decision maker.

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27
Q

Define Understandability

A

Information is understandable if the user comprehends it within the decision context at hand.

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28
Q

What are the 4 accounting assumptions?

A

Entity, going concern, Unit of Measure, Time Period

29
Q

What is the entity assumption?

A

We assume there is a separate accounting entity for each business organization.

30
Q

Waht is the going concern assumption?

A

In the absence of information to the contrary, a business is assumed to have an indefinite life, that is, it will continue to be a going concern.

31
Q

What is the unit of measure assumption?

A

Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the monetary unit of the country in which the business is operated.

32
Q

What is the time period assumption?

A

The indefinite life of a business is broken into smaller time frames, typically a year, for evaluation purposes and reporting purposes.

33
Q

What is Net realizable value?

A

This value is used to approximate liquidation value or selling price. It is the net value to be received after the costs of sale are deducted from the current market value

34
Q

What is the current replacement cost?

A

This value represents how much you would have to pay to replace an asset. Current replacement cost would represent current market value from the buyer’s perspective.

35
Q

What is the current market value?

A

This value is also referred to as fair value. It is the price that would be received to sell an asset (or the price to settle a liability) in an orderly transaction between market participants at the measurement date.

36
Q

What is amortized cost?

A

This value is historical cost less the accumulated amortization or depreciation of the asset.

37
Q

Waht is net present value?

A

This is the value determined from discounting the expected future cash flows.

38
Q

What is the matching principle?

A

recognize expenses only when expenditures help to produce revenues.

39
Q

Define Revenue

A

Revenue refers to increases in assets or the extinguishment of liabilities stemming from the delivery of goods or the provision of services -

40
Q

When does realization occur?

A

Goods or services have been provided (seller performance is substantially complete);
Collectibility of cash is assured - revenue is realizable (buyer performance is complete or assured);
Expenses of providing goods and services can be determined. This criterion becomes important when service or production is provided over an extended period of time.

41
Q

What is the cost constraint?

A

The cost constraint on GAAP limits recognition and disclosure if the cost of providing the information exceeds its benefit

42
Q

What is an asset?

A

Resources that have probable future benefits to the firm, controlled by management, resulting from past transactions.

43
Q

What is a liability

A

Probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities as a result of past transactions or events.

44
Q

What is equity?

A

Residual interest in the firm’s assets, also known as net assets. Equity is primarily comprised of past investor contributions and retained earnings

45
Q

Waht is an investment by owners?

A

Increases in net assets of an entity from transfers to it by existing owners or parties seeking ownership interest

46
Q

What is a distribution to owners?

A

Decreases in net assets of an entity from the transfer of assets, provision of services, or incurrence of liabilities by the enterprise to owners.

47
Q

What is comprehensive income?

A

Accounting income (transaction based) plus certain holding gains and losses and other items. It includes all changes in equity other than investments by owners and distributions to owners.

48
Q

What is a revenue?

A

Increases in assets or settlements of liabilities of an entity by providing goods or services.

49
Q

What is an expense?

A

Decreases in assets or incurrences of liabilities of an entity by providing goods or services. Expenses provide a benefit to the firm.

50
Q

What is a gain?

A

Increases in equity or net assets from peripheral or incidental transactions

51
Q

What is a loss?

A

Decreases in equity or net assets from peripheral or incidental transactions. Losses provide no benefit to the firm.

52
Q

What is Fair Value?

A

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value determination should consider the attributes (e.g., condition, location, restriction on asset use or sale, etc.) of the specific asset or liability being measured.

53
Q

Do transaction and transportation costs affect the fair value?

A

Only the transportation costs.

But transaction cost is included in step 1 (determine which market to make valuation in)

54
Q

What is a transation price/entry price?

A

the price paid when an asset or liability is initially recognized, which may or may not be fair value

55
Q

What is an exit price?

A

Fair value of an asset or a liability is the price that would be received to sell an asset or paid to transfer a liability

56
Q

What do you do if there is a difference between the entry and exit price?

A

Recognize a gain or loss for the difference between the entry price and the exit price

57
Q

What three techniques can be used to determine Fair Value?

A

Market Approach, Income Approach and Cost Approach

58
Q

What is the Market Approach for fair value?

A

This approach uses prices and other relevant information generated by market transactions involving assets or liabilities that are identical or comparable to those being valued.

59
Q

What is the Income Approach for fair value?

A

This approach converts future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value.

60
Q

What is the Cost Approach for fair value?

A

This approach uses the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost), adjusting for obsolescence.

61
Q

How are changes in fair value method accounted for?

A

As a Change in Accounting Estimate

62
Q

Which two type of inputs may be used to evaluate fair value?

A

Observable and Unobservable

63
Q

What is an observable input?

A

Inputs used in pricing an asset, liability, or equity item that are developed based on market data obtained from sources independent of the reporting entity.

64
Q

What is an unobservable input?

A

Inputs that reflect the reporting entity’s own assumptions used in pricing the asset, liability, or equity item that are developed based on the best information available in the circumstances.

65
Q

Rank the levels of the Fair Value Hierarchy in order of the highest to lowest.

A

Level 1, 2, 3

66
Q

What is level 1 of the Fair Value Hierarchy?

A

Inputs in this, the highest level, are unadjusted quoted prices in active markets for assets or liabilities (or equity items) identical to those being valued that the entity can obtain at the measurement date.

67
Q

What is level 2 of the Fair Value Hierarchy?

A

Inputs in this level are observable for assets or liabilities (or equity items), either directly or indirectly, other than quoted prices described in Level 1, above.

68
Q

What is level 3 of the Fair Value Hierarchy?

A

Inputs in this, the lowest level, are unobservable for the assets or liabilities (or equity items) being valued and should be used to determine fair value only to the extent observable inputs are not available.

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