Basic Theory and Financial Reporting Flashcards
Installment Sales
Selling goods on credit but you can’t set up a bad debt expense account because you don’t know the collectability of your receivables.
Revenue is recognized as cash is collected. Gross profit is deferred to future periods and recognized proportinonately to collection of the receivables.
Installment Sales Realized Income (Gross Profit) Formula
1. Cash Collections x Gross Profit % = realized income Net Sales (Installment) -COGS (Installments)=Gross Profit. Gross Profit/Net Sales= GP %
Installment Sales Deferred Income (Gross Profit) Formula
End AR x Gross Profit % = Deferred Income Net Sales (Installment) -COGS (Installments)=Gross Profit. Gross Profit/Net Sales= GP % Beginning AR in Installment Sales - Installment sale collections = End AR
Cost recovery method of accounting
Gross profit on an installment sale is recognized after cash collections equal to the cost of sales is have been received.
Accrual Basis
Revenues are earned when they are earned. Expenses are recognized when they are incurred.
Accounting Standards Codification (ASC)
Replaced all previously issued non-SEC accounting literature. Codification did not change GAAP, it just restructured the existing accounting standards.
Statements of Financial Accounting Concepts SFAC
Not GAAP. The objectives and concepts for use in developing standards of financial accounting and reporting. (Used by FASB)
Materiality
An error or ommission which would affect the judgement of a reasonable person relying on the financial statements.
SFAC No. 8 Ch 3. Qualitative Characteristics (Fundamental)
Relevance: -Predictive -Confirmatory value Fatihful Representation: -Completeness -Neutrality -Free from error
SFAC No. 8 Ch 3. Qualitative Characteristics (Enhancing)
Comparability (also relates to faithful representation)
Verifiability - Direcect & Indirect
Timeliness
Understandability
Asset
Three part definition:
- Obtain it or control it today
- It will provide benefits in the future
- It occurred as a result of a past transaction
Asset continues as an asset until collected
Valuation (contra asset) accounts are part of related assets.
Liability
Three part definition:
- owe it as of today
- you will sacrifice something in the future
- it occurred as a result of a past transaction
Liability remains until settled or discharged
Valuation (contra liability) accounts are part of related liability.
Equity (Net Assets)
Owner’s residual interest in the assets of an entity that remains after deducting liabilities.
A=L+SE
A-L=SE
Transactions or events that change owners’ equity include revenues and expenses, gains and losses, investments by owners, distribution to owners, and changes within owners equity (does not change total amount).
Revenues
Increases in assets or decreases in liabilities (Unearned revenue when revenue is earned) during a period from delivering goods, rendering services, or other activities constituting the entity’s major or central operations (ongoing operations).
Expenses
Decreases in assets or increases in liabilities during a period from delivery of goods, rendering of services, or other activities constituting the entity’s major or central operations.
Gains (Losses)
Increases (Decreases) in equity from peripheral and incidnetal transactions. Not part of major or central operations.
Comprehensive Income SFAC no. 6
the change in equity of an entity during a period from transactions and other events of nonowner sources (all equity amount changes except investment by owners and distributions to owners).
Recognition
The process of reporting an item on the financial statements of an entity, according to FASB Conceptual framework.
Which accounting literature is included in in the FASB Accounting Standards Codification?
AICPA Statements of Position
FASB Statements
Accounting Research Bulletins
The expected cash flow (present value) approach
SFAC 7
Uses all expectations about possible cash flows instead of the single most-likely cash flow. Focuses on direct analysis of the CF in question and on explicit assumptions about the range of possible estimated CFs and their respective probabilities. (When you see the word expected - think “probability”)
Multiple-Deliverable Revenue Arrangements
Exception to the general revenue recognition principles.
Must meet two conditions:
1. delivered item has a value on a stand-alone basis.
2. arrangement includes a right of return for the delivered item, the undelivered item must be substantially in control of the vendor.
Milestone Method
May be used in accounting for R&D Arrangements in which revenue (payments) to the vendor is contingent on achieving one or more substantive milestones related to deliverables or units of accounting.
Revenue Recognition IASB
Must meet all 5 components
- significant risks and rewards of ownership of the goods are transferred to the buyer
- entity does not retain either a continuing managerial involvement or control over the goods
- the amount of revenue can be measured reliably
- It is probable that economic benefits will flow to the entity from the transation, and
- the cost incurred can be measured reliably.
Revenue Recognintion for Services IASB
Revenue can be recognized from rendering services when the outcome can be estimated reliably. (Percentage-of-completion method). Meet 4 criteria:
1. The amount of revenue can be measured reliably
2. it is probable that economic benefits will flow to entity
3. the stage of completion at the end of the reporting period can be measured reliably,
4. the costs incurred and the costs to complete the transaction can be measured reliably.
If these aren’t met, should be recognized using the cost recovery method.
FASB SFAC 6 Elements of Financial Statements
10 elements
assets, liabilities, equity, investments by owners, distribution to owners, comprehensive income, revenues, expenses, gains, and losses.
IASB Framwork Elements of Financial Statements
only 5 elements (FASB SFAC 6 has 10 elements)
assets, liabilities, equity, income, and expenses.
First-Time Adoption of IFRS
“date of transition to IFRS”
the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS F/S
First-Time Adoption of IFRS
“first IFRS reporting period”
the latest reporting period covered by an entity’s first IFRS financial Statements.
COGS Formula
Cash paid for purchases
+ Increases in AP
+ Decreases in inventory
= COGS
Cash payments to suppliers
+ Increase in AP
– Increase in inventory
Cost of Goods Sold
SFAC 6 Defines Allocation
The process of assigning or distributing an amount according to a plan or formula and amortization as an allocation process for accounting for prepayments and deferrals. Allocation is broader in scope and thus includes amortization. Specific examples of amortization include recognizing expenses for depletion, depreciation, and insurance, and recognizing earned subscription revenues.
Measurement bases included in Financial Accounting
Historical Cost
Current Market Value
Discounted Cash Flows
Replacement Cost
Revenue on a franchise agreement
Should be recognized when the franchisor has substantially performed all material services and conditions, and collectibility is reasonably assured. All services are performed and the refund period has expired.
Barter Goods
If the goods are similar in nature and value, then no income or expense is recognized.
SFAC 5 principle of immediate recognition
requires that items carried as assets in prior periods that are discovered to be impaired in value be charged to expense (e.g., a patent that is determined to be worthless).
SFAC 6 “Recognized”
SFAC 6 states that recognition is the process of formally recording or incorporating an item into the financial statements of an entity.
For an item to be recognized in the F/S (IFRS)
IFRS requires that it meets the definition of an element and can be measured reliably.
The FASB Accounting Standards Codification
Effective 7/1/09 Supersedes all previously issued standards and is the only source of US GAAP. (The most authoritative)
Identify the operating procedure for issuing new FASB statements
A new statement is issued after a majority vote of the members of FASB.
SFAC 8 states that information provided by financial reporting pertains to
Individual business enterprises rather than to industries or an economy as a whole or to members of society as consumers.
If Beginning Inventory is (under)/overstated
cost of sales will be going in the same direction as the beginning inventory
If Ending Inventory is (under)/overstated
cost of sales will be going in opposite direction as the beginning inventory
3 types of accounting changes
- Changes in accounting principle
- Changes in accounting estimate
- Changes in reporting entity
Changes in accounting principle
Any change from one generally accepted accounting principle to another to another generally accepted accounting principle.
Ex. change of inventory flow method (FIFO, LIFO Weighted Avg/Moving Avg. )
*changes in depreciation, amortization and depletion are treated as changes in accounting estimates.
Double declining Depreciation method
1/life of the asset change to percentage and multiply by 2= double declining balance.
Restructuring charge
Unusual or infrequent item
A program that is planned and controlled by management and materially changes either the scope of the business undertaken by the company, or the manner in which that business is conducted.
Comparative Financial Statements
SEC requires that a 2 year comparative B/S and a 3 year comparative I/S and Statement of CF be presented.
Calculate Capital
Beginning Capital + Investments + Income - Drawings = Ending Capital
Error Corrections- IFRS overstated sales in PY
Restate the PY F/S presented for comparative purposes.
Prior period error under IFRS
Prior period errors include arithmetic mistakes; accounting policy application mistakes; and recognition, measurement, presentation, and disclosure mistakes.
Three criteria for a prior period adjustment
1) the effect of the adjustment is material to income from continuing operations, (2) the adjustment can be identified with a prior period, and (3) the amount of the adjustment could not be estimated in prior periods.
Change in Accounting Estimates under IFRS
Accounted for prospectively in the period of change and in future periods.
When the estimated useful life of the asset is revised.
The unamortized cost should be allocated over the remaining periods of the new useful life.
The effect of a change in accounting principle which is inseparable from the effect of a change in accounting estimate
Should be accounted for as a change in accounting estimate, accounted for in the period of change and also in any affected future periods.
Changes in accounting principle, IFRS
Changes in accounting principle may occur when the change is required by an IFRS or when it provides reliable and more relevant information.
Changes in accounting principle
Change from the use of one generally accepted accounting principle to another generally accepted accounting principle.
Retrospective application
Changes in estimates
Changes of estimated FS amount based on new information or experience.
Prospective
Changes in entity
Change that results in the financial statements representing a different entity.
Retrospective application
Restatement
The process of revising previously issued financial statements to correct an error.
Sum of the years Depreciation
n*(n+1)/2
n= useful life of the asset
ex. 4 year life, 10,000
4(4+1)/2=10
4/1010,000-salvage value
Voluntary change in accounting method, under IFRS
A voluntary change in accounting method is given retrospective application by applying the policy as if the new policy had always been applied.
Double Declining Balance
(2 x SL Rate) x Net book value at the beginning of each year
(Salvage value is not deducted from the depreciation base.)
Find SL depreciation amount per year, divide by the (HC-SV amount)
the percentage is x 2 for the DDB
Reclassification adjustment
Adjustment made to avoid double counting in comprehensive income items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods.
SEC’s regulation S-X
The form and content of F/S to be filed with the SEC.
IFRS, interest and dividends received
May be reported on the statement of cash flows as either operating or investing activities. Although an entity has reporting discretion, it must be reported consistently.
IFRS, interest and dividends received
May be reported on the statement of cash flows as either operating or investing activities. Although an entity has reporting discretion, it must be reported consistently.
