Basic Concepts & Financial Statements

Question 1

What do Purchasing Power gains and losses do to the financial statements (inflation & deflation)?

Answer 1

Inflation:
Asset - Loss
Liability - Gain
Nonmonetary - N/A

Deflation:
Asset - Gain
Liability - Loss
Nonmonetary - N/A

Question 2

Current Cost accounting vs GAAP

Answer 2

Inventory - Replacement vs Historical
COGS - Avg cost during period vs Historical
Debt securities - Both FV
F/S - Supplemental info vs Basic F/S

Question 3

What info are end users looking for with special purpose frameworks?

Answer 3

Cash receipts & disbursements
Income tax regulations
contractual agreements
authoritative regulatory agency

Question 4

What are the requirements for element recognition in the F/S?

Answer 4

Meets definition
Measurable
Relevant
Reliable

Question 5

What are the qualitative or enhancing characteristics of F/S reporting?

Answer 5

Roger is
Comparability
Understandability
Timeliness
like a
Verifiability

Question 6

Faithful representation

Answer 6

Free from Error
Neutral
Complete

Question 7

What are the objectives of each financial report?

Answer 7

BS - Info about resources and claims
IS - Changes current year (accrual accounting)
CF - Changes listing past CF
OE - Changes not from financial performance

Question 8

Relevance

Answer 8

Predictive

Confirmatory

Question 9

Difference between cash and accrual basis

Answer 9

Cash - revenue when received and expense when paid

Accrual - revenue when earned and expense when incurred

Question 10

Recognition vs Realization

Answer 10

Recognition - when something is measurable, useful, and definable enough to be recorded on F/S

Realization - when something is earned…accrual accounting…expense/revenue in the period it takes place

Question 11

Accrual vs Deferral

Answer 11

Accruals are used when you don’t have the cash but need to recognize NOW

Deferrals are used when you do have the cash but need to recognize LATER

Question 12

Net income equals…

Answer 12

Gross sales - COGS - Exp - Returns = Operating income

Operating income + non-operating income - (OI + NOI * tax rate) = Income from continuing operations

I from CO - (discontinued * (1 - tax rate)) - extraordinary items = Net income

Question 13

Are asset valuation accounts assets, liabilities, or something else?

Answer 13

neither asset or liability accounts. It is a contra asset account.

Question 14

Comprehensive income

***is the CI or OCI?

Answer 14

Derivative CF Hedges
Excess adj of pension PBO & FV of plan assets at YE
Net unrealized holding gain/loss on AFS debt securities
Translation gains and losses

Question 15

Deferred revenue

Answer 15

Cash has been received but services not yet performed. Must defer revenue over the life of the service.

Question 16

Realizing noncash

Answer 16

Seller must enter into an agreement with the buyer and agrees to provide a noncash asset in exchange for a note receivable.

Question 17

Capital maintenance

Answer 17

Net income = physical capital (ignores holding gains and losses)

Comprehensive income = Financial capital (includes holding gains & losses)

Question 18

Comprehensive income

Answer 18

Revenues
Expenses
Gains
Losses

Question 19

FV of non financial asset

Answer 19

Should be the best, reasonable price

Question 20

Characteristics of Fair Value

Answer 20

Market-based measure
Orderly transaction at a specific measurement date
Sale of asset or transfer of liability (exit price)
Three levels of input

Question 21

Risks and Uncertainty disclosures

Answer 21

Nature of operations
Use of estimates
Certain significant estimates
Current vulnerability associated with certain concentrations

Question 22

Reconcile bank to books

Answer 22

Adjust for deposits in transit, outstanding checks, and bank errors for when you want BOOK but have BANK

Adjust for interest, deposits no recorded, charges, returned checks, withdrawals not recorded, recording errors for when you want BANK but have BOOK

Question 23

Cash account balance recording

Answer 23

If at different banks, record + as asset and - as liability

If at same bank, net positive = asset, net negative = liability

Question 24

Are contra-assets included in current asset calcs?

Answer 24

YES

Question 25

Retained Earnings equals…

Answer 25

Revenue - Expense = Pretax NI

Pretax NI - taxes = NI

NI + Unappropriated RE + Restricted = RE

Question 26

General & Admin expenses

Answer 26

Accounting & Legal

Question 27

Current ratio

Answer 27

Current assets / current liabilities

Question 28

Quick ratio

Answer 28

Quick assets (liquid) / current liabilities

Question 29

Inventory turnover

Answer 29

COGS / ((begin inventory + end inventory)/2)

Question 30

A/R turnover

Answer 30

Net credit sales / ((begin A/R + end A/R)/2)

Question 31

Balance sheets…

Answer 31

Show a companies liquidity and financial flexibility

Question 32

Return on assets

Answer 32

Net income / avg assets

Question 33

Avg days sales in inventory

Answer 33

365 / (COGS / Avg inventory)

Question 34

Statement of changes in net position of pensions

Answer 34

Beginning asset + plan additions - plan deductions = OY assets

Question 35

What is considered a cash equivalent?

Answer 35

Cast on hand
Demand deposits
Negotiable paper
Money Market accounts
Investments that are easily convertible or mature in three months or less from date of purchase