Basic Theory and Financial Reporting Flashcards
Accrual basis
Expenses are recognized when related revenues are recorded
Accruals
Recognition precedes cash receipt/expenditure
Current cost
The amount of cash, or equivalent, would be paid if the same item was purchased currently
Current market value
The Amount of cash that would be pAid if the asset is sold
Deferral
Cash receipt/expenditure precedes accrual basis
Cost recovery method
No profit of any type is recognized until the cummulative receipts (principal and interest) exceed the cost of the asset sold
When can installment method of accoutinging can be used
When when uncertainty of the sale price exists. Ordinary profit of sale is recorded
Accrued liabilty
(Expense) that has incurred but not yet paid
In FASB, concept of reliabilty in financial reporting is ?
Neutrality, not precisin, not certainty, or effectiveness
Unerned consulting fee
Money already received but service has not been provdied yet
Prepaid insurNce calculation
Pay attention to the date of the renewal of insurance policy and calculat the remaining months
Deferred cost
A cost that has been paid in advance of its use in business and is an asset
Replacement cost
A measurement base for inventories when the replacement cost has fallen below historical cost
What are the Statements of Financial Accouting concepts intended to establish
The objectives and concepts for use indeveloping standards of financial accounting and reporting
According to FASB, objectives of financial reporting for business enterprises are based on ? A. GAAP B. reporting for regulators C. Need for conservation D. Needs of users of information
The needs of the users of the information
According to FASB conceptual framework, the relevance of providing information in financial statements is subject to the constraint of: A. Comparability B. cost-benefit C. Reliability D. Faithful representation
B. cost benefit constraint to the relevance of providing financial reports. Information is not disclosed if costs of disclosure outweighs the benefits.
Comparability is enhancing qualitative characteristic
Reliability is no longer a part of financial framewdork according to SFAC 8
Faithful representation is fundamental qualitative characteristic
The enhancing qualitative characteritics of financial reporting are:
A. Relevance, reliability, and faithful representation
B. cost benefit and materiality
C. Comparability, verifiability, timeliness, and understandability
D. Completeness, neutrality, and freedom from error
C. Are characterisitcs of enhancing qualitative financial reporting. Relevance and faithful representation are fundamental characteristic of financial reporting. Reliability is not part of characteristic.
Cost benefit is constraint and materiality is threshold for reporting useful info
D is a part of faithful representation
According to Statements of Financial Accounting concepts, neutrality is an ingredient of:
Relevance or both faithful representation
Faithful but not relevance. Neutrality means freedom from biased decisions. Relevance means predictive and confirmatory values
Fasb conceptual framework, which enhancing quality relates to both relevance and faithful representation: A. Comparability B. confirmatory value C. Predictive value D. Freedom from error
A. B c belongs to only relevance. D belongs to faithful
Fasb conceptual framework, process of reporting an item in financial statements of an entity: A. Allocation B. matching C. Realization D. Recognition
SFAC 5, recognition is the process of formally recording or incorporating an item into financial statements as an asset, liability, revenue, expense.
Sfac 6, allocation is process of assigning/distributing an amount according to a plan/formula
Matching is simultaneous recognition of revenues with expenses related directly
Realization is process of converting noncash items into money
Sfac 5, which items cause earnings to differ from comprehensive income?
A. Unrealized loss on investments classified as available for sale securities
B. unrealizable loss on investments classified as trading securities
C. Loss on exchange of similar assets
D. Loss on exchange of dissimilar assets
Per SFAC 5, earnings and comprehensive income have same components - revenues, expenses, gains, and losses - but are not same since earnings have excluded gains and losses. A included in comprehensive income but excluded from earning until realized
Under fasb sfac, comprehensive income excludes changes in equity resulting from which:
A. Loss from discontinued operations
B. prior period error correction
C. Dividends paid to stockholders
D. Unrealized loss on securities classified as available for sale
C. Sfac 6, comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
Fundamental qualitative characteristic of faithful representation has components:
A. Predictive value and confirmatory value
B. comparability, consistency, and confirmatory value
C. Understandability, predictve value, and reliability
D. Completeness, neutrality, freedom from error
D. A belongs component of relevance.
Compa and consist are enhancing
Understandability is enhancing
Conceptual framework, which statments conform to realization concept
A. Equipment depreciat assigned to production department and then to product unit cost
B. depreciated equipment was sold in exchange for a note receivable
C. Cash was collected in accounts receivavble
D. Product unit costs were assigned to cost of goods sold when the units were sold
B. realization is process of converting non cash items resources into money through sale of assets occurs at the time of sale rather than when caash is collected
What is underlying concept that supports estimating a fixed asset impairment charge? A. Subtance over form B. consistency C. Matching D. Faithful representation
D. Estimate of imoairment charge of fixed asset can only be faithful representation if applied the impairment rules properly, disclosed process of arriving at impairment estimate and disclosed any uncertainty.
Fasb conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to current net income, which applied to comprehensive income
The major difference between financial and physical capital maintenance is effect of price changes on assets held and liabilities owed during a period.
Comprehensive income is “the change in equity of a business enterprise during a period from transactions and other events from non owners sources.
Financial capital concept is applied under current GAAP
The concept of physical capital maintenance measure effect of price changes not currently captured under GAAP
Fasb conceptual framework, entity’s revenue result from?
A decrease in liability from primary operations
An increase in asset from incidental transactions
A decrease in asset from primary operations
An increase in liability from incidental transactions
Revenues are inflows of assets or settlements of liabilities, or both, during a period as a result of entityls major or primary operations
Fasb conceptual framework, whihc is essential characterisitc of asset?
Asset is obtained at cost
Asset provides future benefits
Asset is tangible
Claims to asset’s benefits are legally enforceable
Assets have all these features but one common quality shared by all asset is “service potential” or “future economic benefit”
Fasb conceptual framework, which attribtues not be used to measure inventory? Net realizable value Present value of future cash flows Historical cost Replacement cost
Five attributes used to measure assets and liabilities in present practice: historical cost, current(replacement) cost, current market value, net realizable value, and present value of future cash flows.
Only 3 are used to measure inventory at lower of cost or market
Which of the following is not covered by sfac 7?
Determining when fresh-start measurement are appropriate
Expected cash flow approach
Interest method of amortization
Measurements at inital recognition
Sfac 7 provides a framework for using future cash flows as basic for accounting measurements at inital recognition or fresh-start measurement and for interest method of recognition
Limited to measurement issues and not to address recognition questions
In calculating present value in situation with range of possible outcomes all discounted at same interest rate, expected present value would be:
The minimum outcome
Maximum outcome
Most likely outcome
Sum of probability weighted present values
The expected cash flow approach uses all expectations about cash flows in developing measurement, rather than just the single most likely cash flow.
Expected present value refers to sum of probability weighted present values in a range of estimated cash flows, all discounted using the same interest rate convention
Which statements regarding interest methods of allocations is not true?
The term refers both to convention for periodic reporting and approaches to dealing with changes in estimated future cash flows
Interest method of reporitng use present value techniques to compute changes in carrying amount of asset or liability from one to next
Interest methods of allocation are grounded in notion of current cost
Holding gains and losses are generally excluded from allocAtion systems
Like depreciation and amortization conventions, interest methods are grounded in notions of historicak cost, not current cost
Which is not the objective of using present value in accounting measurments?
To capture elements that taken together would comprise a market price if one existed
To estimate fair value
To capture the value of an asset or a liability in the context of particular entitiy
To capture economic difference between sets of future cash flows
The objective of using present value in accounting measurement is to capture the economic difference between sets of future cash flows. The objective of present value when used in accounting measurement at initial recognition and fresh start measurement is to estimate fair value
Stated differently, present value should attempt to capture elements that taken together would comprise a market value
Value in use and entity specific measurements attempts to cApture vAlue of asset
Company decided to end operations and dispose of assets. Net realiable value ofa equipment below historiao cost. What is appropriate measurement basis for equipment? Current replacement cost Current reproduction cost Historical cosct Net realizable value
Guidance on disposal of gains or losses of disposal of component should based in estimTe of net realizable value
Which of following accounting literature is not included in fasb accounting standards codification? Accounting research bulletins Statements if auditing standards Aicpa statements of position Fasb statements
Fasb accounting standards codification includes financial accounting standard boards, the emerging issues task force abstracts, accounting principles board opinions, accounting research buletins, accounting intepretations, aicpa statement of position, aicpa audit and accountinng guide, practice buletin
Lin co. Bought machine for 10k nov 1st. December 30 sold to zee for 15k. Term 2% discount in 3odyas 1% 30-60 days. However, zee has the right ti return the machine if zee unable to sell hten zee obligation would be cancelled. How much for sale of machine to zee? 14,850 14,700 15000 0
Revenue from sale of product recognized at time of sale only iff all conditions:
Seller price is fixed or readily determinable
Buyer has paid the seller or obligated to pay seller
Buyer obligation to seller remains unchanged in event of damage
Buyer is independent from seller
Seller doesnt have any significant obligation regarding resale of product by buyer
Amount of future returns can be reasonably estimated
Royalty assignment, pay royalty for assignment of patent for 3 years, royalties paid should be reported as expense: In period paid In period incurred At date royalty agreement began At date royalty agreement expired
Under accrual accounting, events that change entity’s financial position are recorded in period which the evengs occur
Clark advertising expense account bal of 146k at dec 31 year 1. Before any adjustment:
Included is 15k cost printing catalogs for sales promotional campaign in jan year 2
Radio advertisements broadcast during dec billed on jan 2, year 2. Clark paid 9k invoice on jan 11 year 2
What amount for advertising expense on dec 31 year 1:
131k
155k
140k
122k
Sales promotional campaign in jan, cost associated are expense year 2. Cost removed and recorded as prepaid exp. 9k must be accrued as expense and liability
Roro paid 7k2 renew insurance policy for 3 years in march 1, year 1. March 31, year 1 roro’s unadjusted trail bal have bal of 300 for prepaid insurance and 7k2 for insurance exp. what amounts reported for prepaid insurance and insurance exp for months ended march 31 year 1?
New policy in force for one month, 35 months remained unexpired. Bal in prepaid insu: 7k. Insurance exp should include the cost of last 2 months of old policy and first month of new policy.
Aneen sells one and two year mail order subcriotion. Subscriptions are collected in advance and credited to sales. Analyst of sales activity revealed: Year 1 sales: 400k Year 2 sales: 470k Sub expirstion: Year 1. 12ok Year 2. 155k. 130k Year 3. 125k. 200k Year 4. 140k Indec 31, year 2 bal for unearned sub revenue should be: 455k 479k 340k 465k
At 12/31/y2 liability account unearned subp rev should have baal reflects all unexpired subps. Of year 1 sales, 125k expires y3 and still a liability at 12/31/y2. Totsl lisb is 125+340. The smount removed from sales and recored as liability
Regal sells gift certificates, redeemable for store expire one year after issuance. Regal has following info:
Unredeemed at 12/31/y1. 75k
Year 2 sales. 250k
Year 2 redemptions of prior. 25k
Year 2 redemotion of current. 175k
Exp indicates 10% gift not redeemed. Dec 31, year 2 bal, amount reported as unearned revenue:
112500
50000
125000
100000
Regal unredeem gift at12/31/y1 are 75k. During year 2, these either redeemed or expire. Year 2 250k sold. 10% is nit redeemed
Decker assigns patents to enteprises under various agreements. Some royaltaies received when agreements signed, in other, royalties remitted within 60 days after license year end. Data included in dec 31:
Year 1. Year 2
Royalties receivalbe. 90k. 85k
Unearned royalties. 60k. 40k
During year 2 decker received royalties remittance of 200k. Income statement for year ended dec 31, y2 should report roylaty income of: 225000 195000 220000 215000
The begining receivable bal is subtracted because that portion collected was recognized as revenue last year. Ending receivable bal is added bc amount is year 2 rev. Beginning val of unearned royalties is added bc tpamount is earend during year
What are current assets?
Current assets are identified as resources that are resonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business
How is service contract on product sold satisfied
Revenues should be recognized on a pro rata basis over the term of the contract
Cash basis: zelta reported sales 4mil 6 income statement ended dec 31 y2. Additional info:
12/31/y1. 12/31/y2
Accounts receiva. 1mik. 1mil3
Allowance for uncoll. (60000). (110000)
Zelta wrote off uncollectible 20k. Under cash sales y2?
4mil3
4mil9
4mil35
4mil28
Increase in receivabale means cash collected less than sales during perido, deducted from saales revenue. Writeoff represent recognized sales never be collected therefore deducted to compute collections.
Marr reported rental rev of 2mil210 cash basis ended nom 30 y2.
Rents receivable nov 30y2. 1mil060
Rents receivable nov30 y1. 800k
Uncol written off. 30k
Under accrual, marr report rental revenue:
2mil5
1mil98
1mil92
2mil44
1mil090 + 1mil060 +30k
Class corp has 60k cash pretax income. Following info:
Year2. Year1
Accounts receiv. 40k. 20k
Accounts paya. 15k. 30k
Under accrual, amoutn of income sould report?
65k
95k
25k
55k
Beginning ap is added bc slthouhg this was paid in y2, it is properly accrued as y1 expense. Ending ap is subtracted bc althouhg not paid in y2, should be accrued as y2 expense
White co convert accrual to cash. Both supplies inventory and office salaries payable increased. To obtaini cash basis, these increase be added or deducted .
When company operates accural, supplies are inventoried and expensed as they are uased. Under cash, supplis are expensed as they are paid for.
Under accrual, liability established resulting additional expense over amount of cash paid to employees. Under cash, no liability is accrued and unpaid salaries are not expensed
Before y2, droid used cash basis. As dec 31/y2 droid change to accrual. Doid cannot determine beginning bal of supplies inventory. Effect of inability to determine on accrual net income and accrual basis owner equity
Since droid properyl inventoried supplies at dec 31 its supplies exp would be properly state. Therefore, droid inability to determine y2 beginning supplies no impact on y2 retained earnings
Gant use installment method of accouting. Following info: Installment sales. 500k Regular sales. 300k Cost of installment. 250k Cost of regular sales. 150k General expense. 50k Collections on sales. 100k Amount to report as deferred gross profit? 160 250 200 74k
Regualr sales, cost of regular sales, and general administrative expenses do not affect deferred gross profit account.
Astor uses installment method of revenue recognition :
Year 2. Year 1
Sales. 900k. 600k
Collections.
Year 1 sales. 100k. 200k
Year 2. 300k
Accounts written off Y1 sales. 150k. 50k Year2 sale. 50k Gross profit. Percent. 40%. 30% Amount reported as deferred gross profit? 225k 250k 150k 160k
Under installment sales method, gross profit is deferred to future periods and recognized proportionately to collections of receivable. Therefore, deferred gross computed by. Ultiplying gross profit percent by accounts receivable bal
Y2. Y1
Sales. 900k. 600k
Minus everything
Times gross percentage
220. 30
Luge began operations jan 2 y1. Uses installment sales method of accounting. Info:
Installemnt account receivable dec 31 y2. 800k
Deferred gross profit. Dec 31 y2. 560k
Gross profit on sales. 40%
Cash collections and realized gross profit on sales?
Determine cash collectionns first compute y2 installment sales dividing deferred gross profit by gross profit percentage. Installment account receivable is subtracted to determine cash collections. Realized gross profit is computed by multiplyingw cash collection by gross profit percentage.
Doce co installment sale began jan 1 y1. Following info:
Y1. Y2
Sales. 1mil. 2mil
Gross profit realized
Onsales. Ade in.
Y1. 150k. 90k
Y2. 200k
Gross profit percen. 30%. 40%
Amount of installment accounts receivable should report
Cash collected y1 sales 150k+90k / 30%. Y2 sales 200k / 40. Installment account receivable is computed by subtracting cash collections from original sales amount
Dec 31 y1 mill sold construction to drew for 1mil8. Equipment carrying amount of 1mil2. Drew paid 300k on dec 31 y1, signed 1mil5 note 10% interest payable 5 anuual 300k. Dec 31 y2. Drew paid 300k and 150k interest. Year ended dec 31 y2 revenue from construction sales and financing ? 250k 120k 100k 150k
Gross percentage on sale 600/1mil8. Since 300k collected in y2, gross profit of 100k is realized. Total revenue 100k +150k
Financial statement purposes, installment method of accounting be used if:
Installment are due diferent years
Ultimate amount collectible is indeterminate
Collection period extends over more than 12 months
Percetnage of comoletion method in inappropriate
Profit on sale in ordinary course of business is considered to be realized at the time of sale unless it is uncertain whether the sale price is collected. Us concluded that use if installment method of accounting is not acceptable unless this uncertainty exists
Income recognized using installment method of accounting equals cash colelcted multiplied by:
Gross profit percentage
Gross profit percentage adjusted for expected uncollectible accounts
Net operating profit percentage
Net operating profit percentage adjusted for expected uncollectible accounts
Gross profit percentage only
It is proper to rcognize revenue prior to sale of merchandise when:
Revenue be reportd as an installment sale
Revenue be reported under cost recovery method
Installemnt, revenue recognized after sale, in proportion to cash collected.
Cost recovery, revenue recognized after sale, cummulative receitos exceed cost of asset sold
Sale of real estate from ryan to sud dec 31 y1:
Carrying amount. 2mil
Sale price:
Cash. 300k
Purchase money. 2mil7.
Mortgage payable in 9 annual 300k dec 31 y2. Int 10%. Dec 31 y2 installment paid with interest. Ryan use cost recovery method to accouunt for sale. Amount of income should recognize in y 2?
370k
0
570k
270k
Under cost recovery no profit is recognized until cummulative receipts exceed cost of asset sold. Entire prifit 1mil and y2 interst 270k deferred until cash collected exceed 2mil
Dec 31 y1 rice authorized graf to operate franchise initial fee of 150k. 60k received 3 additional annual 30k each dec 31. Present value of 3 annual payments discounted is 72k. Nonrefundable represents fair measure of service performed. Collectibility of note is certain. Dec 31 y1, unearned franchise fee: 90k 72k 132k 100k
Present value of payments recorded as unearned franchise fees
In which examples of real estate would seller not transfer usual risks and rewards of ownership?
Seller required to suppoer opearions of buyer and be reimbursed on cost plus 5% basis
Seller guarantees return of buyer’s investment
Buyer can compel seller to repurchase property
2 and 3
Esker real estate transaction. Jan 1 y1, esker consummated a sale of property to kame. Amount of profit is determinable and esker not obligated to perform additional activities to earn profit. Kame initial and continuing investments adequate to demonstrate commitment to pay for property. However, esker receivable maybe subject to future subordination. Esker should account for sale using: Cost recovery Reduced cost recovery Full accrual Deposit method
Deposit method used when:
Until cosummated, all activites have been performed
If buyer intitial and continuing investments not adequate to demonstrate commitement to pay and seller not reasonably assured of receovering cost of property if buyer defaults
Reduced orofit method used when:
Intial invesetment is adequate to demonstrate commitment to pay but continuing investment not
Milestone method of accounting may be used to recognied revenue for
Long term construction contracts
Franchise arrangements
Research and development arrangements
Multiple deliverable products or services
Milestone method of accounting may be used to recognize revenue for research and development arrangements.
Milestone method of revenue recogniztion provides that if a milestone is achieved, what amount of revenue is recognized?
A provisions rata share of revenue vased upon percentage deliverd to date
Percentage of total revenue base don the separate units deliverd
Revenue is recognized up to amount of cash collected
Contingent revenue is recognized in its entirety
Contingent revenue may be recognized in its entirety in period the milesone is achieved
Which of organizations responsible for stpetting international financial reporting standards?
International accounting standards committee
International accounting standards board
Fianacial accounting standard board
Financial accounting committee
International accounting standards board. IASB
Iasb framework for preparation and presentaition of financial statemnts, fundameptal qualitative characteristic of relevance includes:
Comparability and timelieness
Predictive value and confirmatory value
Predictive value and feedback value
Verifiability, neutrality and representational faithfulness
Feedback value is not characterisc of relevance
Verifi, neutraility, … Are characteriscs of reliability
Compa and timli are enhancing characterictics
Iasb framework, financial statement element defined as increase in economic benefits during accounting period inform of inflows or enhancements of assets or decrease of liabilities result i. Increases in equity is: Profits Gains Icome Revenue
Iasb framework has five elements: asset, liability, equity, income, and expense.
