BAR Exam Deck 5 Flashcards
national currency based on the location
local currency
primary economic environment currency
functional currency
presentation of financial statements currency
reporting currency
When does remeasurement of a currency occur for a company?
When a subsidiary company needs to remeasure their financial statements from the local currency to functional currency
LOCAL CURRENCY ——> FUNCTIONAL CURRENCY
When does translation occur for a company?
When a subsidiary reports their currency in a functional currency that is different then the parent company’s reporting currency
FUNCTIONAL CURRENCY —> REPORTING CURRENCY
How to determine the cost driver for activity based costing (denominator)?
Choose the cost driver with the highest correlation or coefficient of determination
Change in dependent variable that can be explained by the independent variable
What is the formula for the equity ratio?
Total equity divided by
Total Assets
What are some examples of capital expenditures
Land
Building
Patents
Machinery
How do governmental wide financial statements recognize tax revenue?
GOVERNMENTAL WIDE FINANCIAL STATEMENTS USE FULL ACCRUAL
Calculation
LEVIED PROPERTY TAXES * (1-UNCOLLECTIBLE AMOUNT)=REVENUE RECOGNIZED
How is property that is retained by the government capitalized?
Lower of the cost or market value of the asset
What is the journal entry that government wide statements use to record property tax revenue?
DR: Property Taxes receivable
CR: Allowance for uncollectible taxes
CR Property Taxes Revenue
What are the three types of program revenues for a government?
SOC ACRONYM
S Charges for services
O Operating grants and contributions
C Capital grants and contribution
How do government wide financial statements report expenses?
By their function
What is the thing to remember when it comes to the fiduciary funds in governmental wide financial statements?
They are not included in the statements
What is the journal entry to reflect expired compensatory stock options for employees?
DR: APIC stock options
CR: APIC expired stock options
What are factory foremen and would it be direct or indirect labor?
A supervisor for employees in a factor
Indirect labor
Which of these cost would be in inventory under absorption costing: Fixed Manufacturing Cost, Variable Manufacturing Cost, Fixed SG&A cost, Variable SG&A costs
Variable Manufacturing Costs
Variable SG&A Cost
Fixed Manufacturing Costs
Under Variable costs it would only be the first 2
Who assumes the risk under a defined benefit pension plan and why?
The employer
They have to cover the fixed annuities that are owed to the employee
What are the financial statements that are required for a defined benefit pension plan?
Statement of Net Assets Available for Benefits
Statement of Changes in Net Assets Availaable for Benefits
Statement of Accumulated Plan Benefits
Statement of changes in accumulated plan benefits
What is an interest rate swap?
It is literally when two companies have to owe interest on a loan and are unsatisfied with their current terms so they trade their interest rate agreement with another company.
What type of costs are included in activity based costing?
variable overhead
DM and DL are already allocated directly
What are the three things that make up activity based costing
Total overhead
Cost pools: assembly cost, processing order costs,
Cost drivers: # of units, # of orders
How to find the activity rate in activity based costing?
Cost Pool/Cost driver of cost pool
Why is it after tax cost of debt when calculating the WACC?
There is a tax shield because interest is tax deductible
Formula: Pre tax cost of debt * (1-tax rate)
What is the internal rate of return?
It is the discount rate of a project that makes the net present value of the project equal to 0.
How to determine if a fund is considered a major fund in governmental accounting?
THRESHOLDS
10% times total governmental funds
10% times enterprise funds
5% times combined governmental and enterprise funds
See if the funds are above these thresholds and report them
The General fund is always a major fund and will be reported
What is the formula for the governmental statement of financial position?
Assets
Add deferred outflows
Equals
Liabilities
Add Deferred Inflows
Add fund balance
Balance sheet format
What is the format of the statement of cash flows for proprietary funds?
Operating Activities
Capital and related financing activities
Noncapital financing activities
Investing Activities
How is interest income/cash receipts reported in the statement of cash flows for pro funds?
Investing activities
For profit entities report it in operating activities
How are capital asset purchases reported in the statement of cash flows for pro funds?
Financing activities
The reconciliation of ________ _________ to net cash provided by operations includes depreciation and changes in current assets and liabilities, but does not include adjustments for _____ and _____ because ___ and _____ and nonoperating items are not included in operating income.
Operating income
Gains
Losses
What are included in operating activities for pro funds?
Receipts from customers
Payment to suppliers
Payments to employees
What are included in the investing activities for pro funds SCF?
Proceeds from sales and maturities of investments
Interest
dividends
What are included in captial and related financing activities for pro funds SCF?
Proceeds from capital debt
purchases of capital assets
principal paid on capital debt
interest paid on capital debt
proceeds from the sale of assets
How to calculate the cash flows from operating activities for a proprietary fund?
Operating Income
Add non cash expenses: D/E and Amortization
Less Increase in current assets
Add increases in current liabilities except for long term debt
Gains are not included
What is the presentation of the statement of financial position for a fiduciary fund
Assets
Add deferred outflows
Minus
Liabilities
Deferred Inflows
Equals
Net position
Net position format
When a company acquires another company with intangible assets, are the cost related to valuing the assets from a consulting firm capitalized with the assets or expensed during the same period?
They are expensed during the period they are incurred and are not included in the value of the asset
The successful and profitable launch of a new product line by an entity represents:
value creation
What type of entity in required to report on business segments?
publicly traded enterprises
When it comes to working capital and specifically accounts payable, how does paying them off affect the current ratio and liquidity?
Not paying them means cash would stay the same
Paying them off means a decrease in current liabilities but also a decrease in cash.
This is not necessarily a bad thing
What are included in noncapital financing activities for pro funds SCF?
Operating subsidies and transfer to other funds
What are the fund balance classifications for governmental funds?
Non-spendable
Restricted
Committed
Assigned
Unassigned
How to adjust governmental funds change in net position to government - wide change in net position?
C: Capital Outlay
P: Principal payments
A: Asset disposals
S: Sources (other financing)
R: Revenue - sales tax
I: Interest Expense
DE: Depreciation expense
S: Internal Service fund
Change in net position for governmental wide f/s
What is the formula when reconciling the gov’t fund financial statements to the gov’t wide financial statements for the sale of an asset?
Selling price of the assets
Less Gain from the sale/Add loss from the sale
Equal to the adjustment that is subtracted
Why would a firm choose to finance their operations by equity?
They don’t have to pay dividends and there is not increase in financial risk
Downfall is higher cost
Why would a firm choose to finance their operations by debt?
Debt is less costly because the tax shield
Downfall is they are required to make principal and interest payments each period
What is the highest and best use assumption?
The use of an asset that maximizes its value
What is the market participant assumption?
The transaction takes place between a hypothetical market participant that is knowledgeable, willing, and unforced?
What is the unit of account assumption?
How the asset or liability will be described: individually or grouped with other assets
What is a required part of a local government’s management discussion and analysis (MD & A) section?
Comparing current year results to the prior year with emphasis on the current year
What is the minimum budgetary information required to be reported in the Basic Financial Statement MD&A state and local government section?
A schedule that shows the following
Original Budget
Final appropriations budget
Actual Inflow, outflows, and balances on a budgetary basis
Management’s Discussion and Analysis is a required component of the required supplementary information ___________ the basic financial statements for general-purpose governments.
preceding
Which of the following information is needed to prepare the budgetary comparison schedules for a local government?
original budget
What is the rule when it comes whether to use cash, modified accrual, or fully accrual for budgets?
Whatever the entity legally has adopted is the same method that is used for their budgets
How to calculate inventory turnover?
COGS/(AVERAGE INVENTORY)
What is the formula for the annual operating cash flow?
PRETAX CASH FLOW * (1- TAX RATE) + (DEPRECIATION * TAX RATE)
What type of cost is redesign of a product prerelease?
Research and development expense
What is the rule for amortization of goodwill?
It is not amortized but itis subject to an impairment test
What is the process for determining whether factory overhead is overapplied or underapplied?
Calculate the budgeted factory overhead: In the question it was a certain perdentage of direct labor cost
Compare this to actual budgeted overhead
If it is overapplied then the cost is to high, so you credit the expense to reduce it
What is the setup for calculating Goodwill and non controlling interest in excel for the test under the consolidation method?
DR: CAR AT BOOK VALUE
CR: Investment for the amount paid
CR: Non controlling interest = (Investment/% acquired)-amount paid
DR: Book Value to Fair Value of Net Assets
DR: Intangibles @ FV
DR: Goodwill this is a plug figure
How to calculate total manufacturing costs?
Direct Materials
Direct Labor
Overhead applied
This is the A in the roll forward for the WIP
What is the lease agreement called when it does not extend beyond 12 months and does not transfer ownership to the city at the end of the lease term for a government?
Agreement other than a short-term lease and contract that transfers ownership
How to calculate the after-tax present value of a lease?
PVOA(Cash Inflow per year)
LESS; PV(Cash Inflow per year - per annum tax basis lease amortization) * Tax Rate
Equals After Tax Present Value
What does the special revenue fund do?
Accounts for revenues from taxes or other earmarked sources that are designated for specific activities of government
How to calculate whether the Investment Strategic Business Unit had a favorable year?
Return on Assets
REVENUE-COSTS
TOTAL ASSETS
How to calculate net income in cost accounting?
TOTAL SALES
LESS COST OF GOODS SOLD
LESS SELLING, GENERAL, & ADMINISTRATIVE
What is the days sales outstanding formula?
(AVG ACCOUNTS RECEIVABLE/SALES) * 365
How to find total manufacturing cost when given beginning/ending raw materials, WIP, and FG?
It is the sum of A in the BASE acronym for WIP
Where are unrealized changes in fair value for speculative derivates reported on the financial statements?
They are reported in the income statement.
What are the two exceptions when research and development cost are capitalized instead of expensed?
ALTERNATIVE FUTURE USE
WORK IS UNDERTAKEN ON BEHALF OF OTHER UNDER A CONTRACTUAL AGREEMENT
What is one type of risk that companies using derivatives don’t have to be worried about?
Volatility risk because companies buy derivatives in order to reduce volatility
What is the effect of inflation on debt?
Inflation reduces the present value of future fixed payments
Do a quick example for a principal owed in 1 year for $1,000.
What happens when the discount rate is 5% versus 2.5%
What is the effect of inflation on future expenses?
It will raise the price of future expenses
What is the formula to calculate the future expense?
Future expense = current expense * (1+inflation)^# of years
What are the three main types of books for governmental fund accounting?
BAE
Budgetary
Activity
Encumbrance
What is the beginning of the year journal entry for budgetary accounting?
DR: Estimated Revenue Control
CR: Appropriations Control
Budgetary Control can either be a debit or credit to balance journal entry and this is similar to an equity account for a for-profit entity
What is the end of the year journal entry for budgetary accounting?
DR: Appropriations control
CR: Estimated Revenue Control
Budgetary Control can either be a debit or credit to balance journal entry depending on the beginning of the year J/E
What is a simple way to know how much gross profit to recognize for a construction contract during a given year?
CONTRACT PRICE
COST INCURRED IN THE PAST
COST INCURRED IN THE CURRENT YEAR
COST THAT ARE ESITMATED TO BE INCURRED
EQUALS THE TOTAL GROSS PROFIT
Next thing is to calculate the current year gross profit
SUM COST INCURRED IN THE PAST AND COST INCURRED IN THE CURRENT YEAR
Divide this by the total cost
Multiply this by the GROSS PROFIT
Subtract out gross profit that has already been recognized
What happens when you are the lessee and you have to amortize an ROU asset?
Present value of lease/estimated useful life of the asset
I was confused if it was useful life or lease term, but it’s useful life
What is the journal entry to recognize amortization expense for a finance lease of a lessee?
DR: Amortization expense
CR: Accumulated Amortization - ROU Asset
When would be the earliest period in which a company would exercise a call option that they have bought?
The period were the market price is high enough to cover their transaction cost
EXAMPLE
STRIKE: 20, FMV: 25, TRANSACTION COST 2
Gain=(25-20-2)=3
What are two types of derived tax revenues?
Sales Tax
Income Tax
What are two types of non-exchange revenues?
Fines
Property Taxes
What are the journal entries for the purchase method for expenditures?
Buying an Item
DR: Expenditure
CR: Vouchers Payable
On hand at year end
DR: Supplies Inventory
CR: No spendable fund balance - Inventory
What are the journal entries for the consumption method for expenditures
Buying an item
DR: Supplies Inventory
CR: Vouchers Payable
Use of Item(Consumption)
DR: Expenditure
CR: Supplies Inventory
A governmental fund purchases a new police car. What is the journal entry?
DR: Expenditure - Capital Outlay
CR: Vouchers payable (Or cash)
A governmental unit receives the proceeds of a bond issue of $1,000,000. What is the journal entry recorded?
DR: Cash 1,000,000
CR: Other financing sources - bonds issued 1,000,000
A muni pays 125,000 in principal and 100,000 in interest on its general long term debt. What is the journal entry?
DR: Expenditure - principal 125,000
DR: Expenditure - interest 100,000
CR: Cash 225,000
What is the initial journal entry for lessee accounting in governmental funds?
DR: Expenditure - capital outlay
CR: Other financing sources
What is the journal entry for a lessee when making principal and interest payments for a governmental fund?
DR: Expenditure - principal
DR: Expenditure - interest
CR: Cash
What are the focus of governmental wide-financial statements?
operational accountability
What is the focus of fund financial statements?
Fiscal accountability
When are property tax revenues, public parking revenues, income tax revenues, and sales tax revenues recognized for a state or local governmental body?
When the are measurable and available or if they are collected within 60 days of year end for governmental fund F/S
The reconciliation of governmental fund financial statements to a government-wide presentation would most likely be found in a city’s:
Basic Financial Statements
What are reciprocal activities for governmental accounting?
This is just like an exchange transaction
You do something and you get something in return
What are examples of reciprocal activities?
Payments for purchases of goods and services
Loans and repayments of loans
What are examples nonreciprocal activities?
transfer of cash when there is not good or service
Interfund reimbursements
How to calculate the goodwill that a company recognizes when acquiring another company?
Investment amount/Investment % = What the company thinks the fair value is
Company estimate of fair value - Actual Fair value of company = Goodwill
The range for which the assumptions of the cost driver are valid
relevant range
How is a refundable security deposit recorded?
The deposit would be all refundable
Money that is set aside for specific government departments, agencies, and programs. This is the amount that is authorized to be expended by the governmental unit in a given time period
appropriations
money that is forecasting as financial resource inflows from governmental revenues
estimated revenues
The general rule is that measurable and available criterial indicates that the revenues collection period will not exceed a ______ day time period
60
Imposed non-exchange revenue examples
Property taxes
fines and penalties
How to calculate the net cash flow when there is acquisition of a capital asset with inflows and depreciation expense?
Calculate the annual inflow
Annual inflow * (1-tax rate)
Add: (Depreciation expense * tax rate)
After tax cash flow
utilizes a taxonomy with tags that identify and define data found within the financial statements and supporting footnotes.
XBRL
What is the transaction called when a company wants to divest by an initial public offering (IPO)?
Equity carve-out
What does a perfectly inelastic supply curve look like?
P is on the y axis Q is on the x axis
The supply curve would be vertical while the demand curve would be sloped downward
Quantity supplied does not change as a result of the change in price
How to calculate variable overhead efficiency variance?
Usually related to direct labor hours as the driver
(Actual hours used less budgeted hours based on actual units) = difference
difference * budgeted rate
a formal agreement that allows the supplier (seller) to convert amounts owed by the buyer into a negotiable instrument.
trade acceptance
How to calculate the fair value of an intangibles with an indefinite life?
Estimated future gross revenue less estimated future cost of disposing
Compare this amount to the current carrying value to find if there is impairment loss
How to calculate free cash flow?
Operating Cash Flow Less Capital expenditures
How to calculate core earnings?
earnings derived from the company’s primary business activities
What does a supply/demand curve with a price ceiling look like?
Supply is upward sloping
Demand is downward sloping
The price ceiling is a horizontal line below the equilibrium point
This causes a shortage
The incremental costs of obtaining a contract are costs incurred that would not have been incurred if the contract has not been obtained, these costs are ___________________ if the entity expects that it will recover these costs
capitalized
What are examples of incremental costs of obtaining a contract?
legal fees for drawing up the contract
commissions to sales employee
How to calculate the margin of safety?
Current sales - Breakeven sales
What are storage, insurance, obsolescence, and spoilage associated with holding inventory associated with?
carrying costs
unsecured debt issued by a corporation and maturing in 270 days or less. Proceeds used to finance current assets or to meet short-term obligations
commercial paper
What rate is used when remeasuring inventory?
The weighted average because inventory is sold throughout the year
Do you start with the balance sheet or the income statement with remeasurement and translation?
Remeasurement starts with the balanance sheet and retained eanrings is a plug
Translation starts with the income statement and this calculates AOCI
How can a company reduce transaction risk when they have an A/R in a foreign currency.
Enter into a forward contract to sell that currency
What is the cash conversion cycle and what is the formula for each part?
DAYS IN RECEIVABLES
Ending A/R
(Sales/365)
DAYS IN INVENTORY
Ending Inventory
(CoGS/365)
DAYS IN A/P
Ending A/P
(CoGS/365)
How to find out how much a government can spend on capital purchases?
Original Apprroriatoions
Less current expenditures
less encumbrances
Equals amount the government has left to spend on additional purchases
The decision rule for the company to follow in order to maximize shareholders’ wealth is to invest in all projects having a (n):
Net present value greater than zero
What is the formula to calculate number of units to sell to equal desired profit
X = (Fixed Cost + (Selling price * desired profit ))/(Selling Price - Variable Costs)
What is a major line item in the statement of accumulated plans benefits and statement of changes in accumulated plan benefits?
Actuarial present value of accumulated plan benefits
What is a major factor when considering what rate of return investors require?
The inflation rate
If inflation is expected to be lower in the future, the RRR will be lower as well.
What are two examples of noncapital financing activities (This was a bookmark MCQ example)?
Property tax receipts to subsidize operations
Operating transfers out
a third party guarantee, generally by a bank, of obligations incurred by a company.
letter of credit
How are construction in progress expenditures reported in governmental fund and governmental wide financial statements?
They are closed out in government funds and only reported in governmental wide financial statements
What do gross margin and contribution margin relate to?
Gross Margin: Absorption costing
Contribution Margin: Variable Costing
How to calculate the sales mix variance if there are two products?
(Actual units - budgeted units) * budgeted cm
Calculate this for both products and add them up
Example is from producing two cars in an MCQ question
The impact of a government price support program would most likely result in which of the following?
Lead to surpluses
This will lead to an increase in supply which causes a surplus
The collective or composite view of different risks (e.g., default and liquidity risks, etc.) at a particular level of the entity (e.g., length of loan) that position management to consider the types, severity, and interdependencies of risk and how they may affect performance relate to strategy and business objective
risk profile
Goodwill should be tested for value impairment at which of the following levels under U.S. GAAP?
Each reporting unit
