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FAR > 2100: Conceptual Framework > Flashcards

2100: Conceptual Framework Flashcards

1
Q

What are the reports and deadlines* (in days) by company size required by SEC for publicly traded companies?

*# days after the end of the quarter to which it applies by which it is due

A

10K- Annual comprehensive report that includes audited financial statements
10Q - Quarterly report

Large Accelerated Filers ($700MM+) - 60K (was 75 FYE < 12/15/06), 40Q
Accelerated Filers ($75MM - $699MM) - 75K, 40Q
Non-accelerated Filer (<$75MM) - 90K, 45Q

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2
Q

For Statement of Cash Flows, how can cash inflow (selling price) be determined when carrying value and gain (loss) is known?

A

Carrying Value + Gain (- Loss) = Selling Price

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3
Q

What are examples of other comprehensive income?

A

Foreign currency translation adjustments
Unrealized holding gains and losses on debt securities
Prior service costs/credits associated with postretirement benefits

It is a change amount, not cumulative resulting from nonowner sources and includes components of net income and other comprehensive income.

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4
Q

What are the two statements of personal financial statements and the elements in order for each?

A

Statements of Financial Condition (Single Date):
Assets (current value)
Liabilities (current value) - includes Income Tax Payable as estimated on elapsed portion of current year
Estimated Income Taxes on difference between asset/liability current value and tax bases
Net Worth

Statements of Changes in Net Worth (For Years Ended):
Realized Increases
Realized Decreases
Net Realized Change

Unrealized Increases
Unrealized Decreases
Net Unrealized Change

Overall Net Change
Net Worth Beginning of Year
Net Worth End of Year

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5
Q

Name and describe four basic accounting principles.

A

Objectivity - substantive economic activity is presented without bias
Continuity
Consistency
Disclosure

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6
Q

How are extraordinary items defined and presented?

A

Extraordinary items are material and both* unusual in nature and infrequent in occurrence. These are presented separately after Income from Continuing Operations. Also presented separately here are effects of discontinued operations and changes in accounting principles as distinctive parts of Net Income.

*If either but not both, items are presented as a separate component but within Income from Continuing Operations.

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7
Q

How are intercompany sales to a subsidiary determined from separate and consolidated financial statements?

A

Intercompany sales are eliminated in consolidation.

Total separate revenues - Consolidate revenues = Revenues eliminated in consolidation*

*given = intercompany sales are at the same mark up

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8
Q

Define vulnerability to concentrations and the criteria for its disclosure

A

Risk due to lack of diversification.

Must be disclosed when concentration

  1. exists and it is
  2. at least reasonably possible that events will occur in the near-term
  3. causing severe impact.
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9
Q

What is the function of consolidated financial statements?

A

Report a parent and its subsidiaries (separate legal entities) as though they are a single economic entity. The consolidating process takes place on worksheets and schedules separate from any set of books. They are the primary form of financial statement disclosure under GAAP because the entities are under common economic control.

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10
Q

What are characteristics of a legal acquisition?

A

Remain separate legal entities
Parent-Subsidiary
Common economic control
Ownership > 50% of voting stock

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11
Q

How does IFRS differ from GAAP regarding Income Statement?

A

Under IFRS:
Classify expense by nature or function/if function, disclose nature in note.
Extraordinary items prohibited
Narrower definition of discontinued operations.

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12
Q

What are the components of Relevant?

A 
Predictive value (useful to forecast)
Confirmatory value (provides feedback on prior evaluations) 
Material (omission/misstatement could influence decisions)
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13
Q

What items do not appear in the revenue section of a Single-Step Income Statement?

A

Discontinued Operations

Changes due to change in accounting method

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14
Q

Define modified cash basis and give some examples.

A

Hybrid method combining features of both cash and accrual basis. Provides more information while avoiding complexities of GAAP, but only complies with GAAP in the absence of material differences.
Modifications include capitalization of assets and
accrual of income taxes.
Adds accumulated depreciation to long-term assets and liability for income taxes to B/S and depreciation expense and income tax expense to I/S.

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15
Q

What are the objectives and specifics of IFRS 1?

A

First-time Adoption of IFRS developed by IASB:
First IFRS financials and interims provide high-quality, transparent, comparable over all periods presented info at a suitable starting point in which costs do no exceed benefits.
Contain explicit unreserved statement of IFRS compliance.
Difference from GAAP are adjusted to RE or other equity account, if appropriate.
Must include the following statements:
3 financial position
2 comprehensive income
2 income
2 cash flow
2 changes in equity
all related notes

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16
Q

What is other comprehensive income?

A

revenues, expenses, gains, loss required by GAAP

included in OCI but excluded from NI

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17
Q

Examples of OCI

A

foreign currency FS translation adjustments

g/l on foreign currency transactions that qualify as hedges, l/t investments, cash flow hedges

unrealized holding g/l on AFS securities, trxfrs from HTM to AFS

other-than-temp impairment AFS ans subsequent decreases/increases

delayed recognition of pension/pr g/l, prior service costs/credits, transition assets/obligations

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18
Q

Presentation of OCI

A

single continuous statement of comprehensive income with two sections with components and subtotals for NI & OCI with a grand total
OR
two statements: NI with components/total & OCI with NI, OCI components/total, CI

OCI/CI represents changes not cumulative unlike BS
Disclosure is not satisfactory, must be presented
No longer reportable on stmt of changes in equity

Like US GAAP, IFRS allows separate or combined Statement of Comprehensive Income

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19
Q

How does an entity provide info regarding significant amounts reclassified out of accum OCI to NI?

A

Face of Statement or Separate Disclosure

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20
Q

What equation displays relationship of NI to CI?

A

NI + OCI = CI

CI includes all nonowner changes to equity (excludes owner investments and distributions)

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21
Q

What are the two fundamental QUALITATIVE characteristics?

A

Relevance:
Predictive and/or Confirmatory
Material

Faithful Representation:
Complete
Neutral
Free From Error

Qualitative Characteristics converged with IFRS with issuance of SFAC 8, CH 3

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22
Q

What are the four ENHANCING characteristics?

enhance the usefulness of information that is Relevant and Faithfully Represented

A

Comparability
Verifiability
Timeliness
Understandablilty

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23
Q

What is a pervasive constraint?

A

Cost Benefit

24
Q

Attributes of Modified Cash Basis

A

Hybrid of cash/accrual methods

Modifications:
Capitalization of assets
Accrual of income taxes

Results of Modifications:
B/S
L/T assets
Accum Depr
Liability for income taxes
I/S
Depr Exp
Income Tax Exp

Does not comply with GAAP unless no material differences

25
Q

Describe the requirements for Accounting Policy disclosure.

A

Description of all significant accounting policies is required for business and NFP enterprises
Does not apply to unaudited interim if no changes to policy
1. disclose judgments related to rev rec and alloc of asset costs to current and future
2. selection among alternative methods
3. principles/method peculiar to industry
4. unusual/innovative GAAP
5. ideally summary precedes notes
6. summary should not duplicate areas
7. summary may need to cross reference other areas

Principles/Methods for Disclosure include depr methods, consolidation basis, interperiod tax alloc, inven pricing, rev rec methods

IFRS requires footnote disclosure for accounting policies

26
Q

How are foreign currency translation adjustments accounted for?

A

Separately
Accumulated in separate component of equity
Net Loss equates to stockholders’ equity contra account
OCI = direct charges or credits to equity

27
Q

What is the general rule to convert from cash to accrual basis?

A

Add beginning liability balances and subtract the ending liability balances

And

subtract beginning asset balances and add ending asset balances.

AE - AB + LB - LE

28
Q

How is SCF prepared using Indirect Method?

A

Begin with NI (not CI) and eliminate noncash revenues and expenses (not equity items) by adjusting for changes during the period in related asset and liability (not equity) accounts on the Balance Sheet.

29
Q

What is the difference between physical and financial capital and which effect financial statements?

A

Primary difference is regarding the affects of price changes on assets held and liabilities owed. Capital Maintenance concept differentiates return on and return of capital.

Physical Capital - changes are called capital maintenance adjustments and included directly in equity (return of)

Financial Capital* - changes are holding gains and losses and are included in return on capital

*Traditional view presented in financial statements NI and CI

30
Q

How does amortization of bond discount affect SCF?

A

Amortization of a bond discount results in interest expense greater than cash interest. The amortization amount (a noncash expense deduction) is added back to cash provide/used in operating activities.

31
Q

What supplemental disclosures (SCF or notes) are required to SCF regardless of method (direct/indirect)?

A

income tax paid
interest paid
reconciliation of net income and net cash flows

32
Q

Identify and define the three categories of activities for SCF.

A

Operating - not financing or investing activities that generally affect net income including production & sales, INTEREST & DIVIDENDS (interest & dividends received and interest paid are not investing/financing)

Investing - making/collecting loans, acquiring/disposing of debt or equity instruments of other enterprises & PPE (entity’s own assets)

Financing - obtaining resources from owners, providing owners with return on/of investments, obtain/repay debt (issue stocks, bonds, notes and pay principal/dividends)

33
Q

Define Articulation

A

elements of financial statements are fundamentally interrelated:

beginning balance + changes = ending balance
assets = liabilities + equity

debits = credits (double entry) incorporates the above

BS depends on NI from IS
BS changes are reflected in SCF

34
Q

SEC Regulation S-X

A

form, content, requirements for FS for Registration and 10-K

35
Q

SEC Regulation S-K

A

requirements for nonfinancial statement forms (disclosure) per Securities Act 1933, Securities Exchange Act 1934 and Energy Policy & Conservation Act 1975

36
Q

Calculate Net Income

A 
(Gross Sales
-Sales Returns
(= Net Sales)*
- COGS
(= Gross profit)*
- Selling Expense
- General/Admin Exp
(= Operating Income)* 
\+ Other Income (Ordinary Gains (asset sales, trading, dividends)
- Other Expense (Int on l/t debt, Ordinary Loss, trading)
(=Income before tax)*
- Provision for Income tax (IBT x Tax Rate)
(= Inc from Cont Ops)*
- Loss on Discontinued Ops
(= Income before ExoI and CiAPs)*
\+/- Extraordinary G/L net of tax
\+/- Cum Effect of changes in accounting principles
= Net Income)*
37
Q

What are components of COGS?

A

Purchases, Purchase Returns, Freight In

COGS Calculation:
Beg Inv
\+ Purchases
- Purchase Returns/Allow
\+ Fr In
- End Inv
= COGS
38
Q

What are components of Selling & Admin Expenses?

A

Sales Rep Compensation

Freight (Transporation) Out

39
Q

When are royalties received (or paid) reported as revenue (expense)?

A

Accrual Method:
Revenues are recognized when earned rather than when cash is received.

Expenses are recognized when incurred rather than when cash is paid.

When royalties are paid, payer should debit an asset account (prepaid royalties) rather than an expense account. The royalties paid should be reported as expense in the period incurred (by debiting royalty expense and crediting prepaid royalties).

When royalties are received, recipient should debit cash and credit a liability account (unearned royalties) rather than a revenue account. The royalties should be reported as revenue in the period earned (by debiting unearned royalties and crediting royalty revenue).

40
Q

Set off

A

Improper unless right exists by all of the following:

  1. Both parties owe each other determinable amounts
  2. Reporting entity has the right to set off
  3. Reporting entity intends to set off
  4. Set off is enforceable by law
41
Q

Provision for income tax in financial statements of a sole proprietorship

A

Not required

42
Q

Calculate TCI*

*Accumulated OCI

A

Net Income** + OCI*

*OCI includes AFS unrealized holding gains/losses and foreign currency translations.

**NI already includes Extraordinary, Discontinued, Accounting Changes. Do no double count.

Reported in stockholder’s equity section of BS

43
Q

Excess of proceeds over cost of Treasury Stock

A

Credit APIC TS (contra equity)
Not asset or income
“loss” can decrease RE
“gain” will rarely increase RE

44
Q

TS Method and EPS

A

Proceeds from exercising options or warrants are used by company to buy back CS as TS up to 20% O/S
Net increase in shares (from exercise less buy back) is added to WAC in denominator of diluted EPS

45
Q

Elements of Statement of SE

A

Column headings of individual SE accounts
Chronological events changing SE on left
Body is dollar impact of transactions/events
Changes to # of shares included on left
Ending balances tied to items presented

46
Q

Primary focus of personal financial statements and implications

A

Assets and Liabilities recorded at
Estimated Current Value:
(exchange between informed and willing buyer and informed and willing seller)
(more relevant to users than historical cost and lenders typically require)

47
Q

Explain GAAP

A

Basic Concepts underlying financial accounting and reporting that have
Substantial Authoritative Support and include
Pronouncements (FASB ASC + APB, GASB, SEC, AICPA, and more)
Required to follow per Rule 203
Principles continuously Change over time

48
Q

Performance indicators

A

Business = profit/net income (single indicator?)

Non business = inflows/outflows of resources AND service efforts/accomplishments (no single indicator)

49
Q

Net Cash used in Investing Activities

A

Actual Cash Inflow (Proceeds) from Sale of a LT Asset (not the gain)

Actual Cash Outflow (Expenditure) for investment in debt or equity securities. Ignore Amortization.

*If gain/loss on LT asset and CV of LT asset are given, calculate the proceeds.

50
Q

Cash Equivalents

A

Policy may be to categorize as such if 3 months from

Maturity
or
ORIGINAL Maturity

51
Q

IFRS vs GAAP and SOCF

A

Bank Overdrafts:
IFRS - financing, GAAP - operating
IFRS - may be netted in assets if negative balance is cash mgmt
GAAP - liability

Interest & Dividends:
GAAP - operating, IFRS - operating or investing

Extraordinary Items
GAAP - disclose separately, IFRS - does not use extraordinary items

52
Q

Income Tax Basis - Cash Method

Income Recognition

A

3 acceptable methods:
Cash, Accrual and Hybrid

Under the cash method, income is recognized when “constructively received”*

*readily available AND actual receipt no subject to substantial limits/restrictions

53
Q

SEC rulemaking procedures

A 
Concept Release (only if so unique/complicated that public input is sought)
Rule Proposal
Rule Adoption
54
Q

Amortization of Bond Premium/Discount on SOCF

A

Subtract Premium/Add Discount from NI

Noncash portion of Interest Expense

55
Q

US GAAP & IFRS, Statement of Changes in Equity

A
  1. Both use “retained earnings”
  2. IFRS uses “revaluation surplus” for PPE, intangibles, minerals
  3. US GAAP “Common Stock”, IFRS “Share Capital”
  4. IFRS T/S retirement: charge excess in purchase price and issue cost to paid-in-captal

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