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FAR > Basic Concepts > Flashcards

Basic Concepts Flashcards

1
Q

What is the primary objective of accounting?

A

To measure income

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2
Q

Name the single source of authoritative nongovernmental US GAAP.

A

FASB “Accounting Standards Codification” (ASC).

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3
Q

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

A

Authoritative and Non-Authoritative

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4
Q

What standards does the term “International Financial Reporting Standards” include?

A
  • International Accounting Standards (IAS)
  • International Financial Reporting Standards (IFRS) • IFRIC Interpretations
  • SIC Interpretations
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5
Q

What are the three objectives of financial reporting by business enterprises?

A

To provide:
• Information useful in investment, credit and similar decisions
• Information useful in assessing cash flow prospects
• Information about enterprise resources, claims to those resources, and changes in them

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6
Q

Name the pervasive constraints in the hierarchy of accounting qualities under the FASB concept statements.

A
  • benefit > cost

* materiality

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7
Q

Name the pervasive constraints in the hierarchy of accounting qualities under the IFRS framework.

A
  • timeliness
  • benefit > cost
  • balance between qualitative characteristics
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8
Q

Name the two primary decision-specific qualities of useful accounting information.

A
  • relevance

* faithful representation

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9
Q

Define relevance! What are the elements of relevance?

A
  • relevance = capability to make a difference in decisions
    requires:
  • predictive value (can be used as an input to processes employed by users to predict future outcomes)
  • confirmatory value (vides feedback (confirms or changes) about previous evaluations)
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10
Q

Explain faithful representation!

A

Requires three characteristics:

  • Complete (i.e., includes all information necessary for a user to understand the phenomenon being depicted)
  • Neutral (i.e., without bias in the selection or presentation of financial information)
  • Free from error (i.e., errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process)
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11
Q

Name the enhancing qualitative characteristics of accounting information.

A
  • Comparability
  • Verifiability
  • Timeliness
  • Understandability
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12
Q

What should a full set of financial statements include according to SFAC #5?

A
  • statement of financial position (BS)
  • statement of earnings (IS)
  • statement of comprehensive income
  • statement of shareholders’ equity
  • statement of cash flows
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13
Q

What is the difference between realization and recognition?

A

Realization: When sold and converted to cash (or claims to cash).
Recognition: When recorded in the financial statements.

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14
Q

How does managerial accounting differ from financial accounting?

A

Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP

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15
Q

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

A

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

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16
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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17
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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18
Q

What is an accrual?

A

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

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19
Q

What is a deferral?

A

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

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20
Q

What is recognition in accounting?

A

When an item is recorded and included in the financial statements

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21
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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22
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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23
Q

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

A

Price quotes or market prices

For example NYSE or NASDAQ

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24
Q

What items are included in a Level 2 valuation input?

A

Interest rates

Prime rate

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25
Q

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

A

Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation

26
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

27
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

28
Q

What are current liabilities?

A

Liabilities that will use current assets during the present operating cycle

29
Q

What is an accrued liability?

A

Expense that has been incurred but not paid

Example: rents payable

30
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

31
Q

When are revenues recognized?

A

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

32
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

Can be operating or non-operating

33
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

Can be operating or non-operating

34
Q

What is an operating cycle?

A

Average time it takes to turn materials or services into Cash

35
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

36
Q

What is historical cost?

A

How much an asset cost - (net of depreciation and amortization)

37
Q

What is replacement cost?

A

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

38
Q

What is a market cost?

A

The sale price of an asset (Exit Cost)

39
Q

What is Net Realizable Value?

A

Sale Price of an Asset - Selling/Disposal Fee

40
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

41
Q

When is revenue recognized in an installment sale?

A

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

42
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

43
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

44
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

45
Q

How are franchise revenues recorded?

A

Franchiser - Startup franchise fee revenue deferred until franchisee has completed substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized

46
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

47
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

48
Q

How are discontinued operations reported? When are they used?

A

Reported Net of Tax after Continuing Operations but before Extraordinary Items

Company decides to cease operating a segment of its business

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

49
Q

What qualifies as an extraordinary item? How is it recorded?

A

Both unusual AND infrequent

Reported Net of Tax after Discontinued Operations

Note: Usual or Infrequent Items are reported as part of Continuing Operations

50
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)

51
Q

When are expenses recognized?

A

When they are incurred. Accrue if not yet paid.

52
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

53
Q

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

A

Immediately.

54
Q

What major items should be classified under General & Administrative (G&A) 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

55
Q

What are business start-up costs?

A

One-time costs for opening a new business

Expensed as they are incurred

56
Q

When is interest not expensed?

A

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

57
Q

What are the major components of Comprehensive Income?

A

Net Income + Other Comprehensive Income (OCI):

Revenues/Expenses

Gains/Losses

Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity

58
Q

What items are considered cumulative accounting adjustments?

A

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

59
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

60
Q

Where is Comprehensive Income reported?

A

Reported in a Single or Combined Income Statement

61
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

62
Q

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

A

Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability

FAR (18 decks)

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