Basic Theory and Financial Reporting

Question 1

Installment Sales

Answer 1

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.

Question 2

Installment Sales Realized Income (Gross Profit) Formula

Answer 2

1. Cash Collections x Gross Profit % = realized income 
Net Sales (Installment) -COGS (Installments)=Gross Profit. 
Gross Profit/Net Sales= GP %

Question 3

Installment Sales Deferred Income (Gross Profit) Formula

Answer 3

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

Question 4

Cost recovery method of accounting

Answer 4

Gross profit on an installment sale is recognized after cash collections equal to the cost of sales is have been received.

Question 5

Accrual Basis

Answer 5

Revenues are earned when they are earned. Expenses are recognized when they are incurred.

Question 6

Accounting Standards Codification (ASC)

Answer 6

Replaced all previously issued non-SEC accounting literature. Codification did not change GAAP, it just restructured the existing accounting standards.

Question 7

Statements of Financial Accounting Concepts SFAC

Answer 7

Not GAAP. The objectives and concepts for use in developing standards of financial accounting and reporting. (Used by FASB)

Question 8

Materiality

Answer 8

An error or ommission which would affect the judgement of a reasonable person relying on the financial statements.

Question 9

SFAC No. 8 Ch 3. Qualitative Characteristics (Fundamental)

Answer 9

Relevance: 
-Predictive 
-Confirmatory value 
Fatihful Representation: 
-Completeness 
-Neutrality 
-Free from error

Question 10

SFAC No. 8 Ch 3. Qualitative Characteristics (Enhancing)

Answer 10

Comparability (also relates to faithful representation)
Verifiability - Direcect & Indirect
Timeliness
Understandability

Question 11

Asset

Three part definition:

Answer 11

1. Obtain it or control it today
2. It will provide benefits in the future
3. 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.

Question 12

Liability

Three part definition:

Answer 12

1. owe it as of today
2. you will sacrifice something in the future
3. it occurred as a result of a past transaction

Liability remains until settled or discharged
Valuation (contra liability) accounts are part of related liability.

Question 13

Equity (Net Assets)

Answer 13

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).

Question 14

Revenues

Answer 14

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).

Question 15

Expenses

Answer 15

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.

Question 16

Gains (Losses)

Answer 16

Increases (Decreases) in equity from peripheral and incidnetal transactions. Not part of major or central operations.

Question 17

Comprehensive Income SFAC no. 6

Answer 17

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).

Question 18

Recognition

Answer 18

The process of reporting an item on the financial statements of an entity, according to FASB Conceptual framework.

Question 19

Which accounting literature is included in in the FASB Accounting Standards Codification?

Answer 19

AICPA Statements of Position
FASB Statements
Accounting Research Bulletins

Question 20

The expected cash flow (present value) approach

SFAC 7

Answer 20

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”)

Question 21

Multiple-Deliverable Revenue Arrangements

Answer 21

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.

Question 22

Milestone Method

Answer 22

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.

Question 23

Revenue Recognition IASB

Answer 23

Must meet all 5 components

1. significant risks and rewards of ownership of the goods are transferred to the buyer
2. entity does not retain either a continuing managerial involvement or control over the goods
3. the amount of revenue can be measured reliably
4. It is probable that economic benefits will flow to the entity from the transation, and
5. the cost incurred can be measured reliably.

Question 24

Revenue Recognintion for Services IASB

Answer 24

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.

Question 25

FASB SFAC 6 Elements of Financial Statements

Answer 25

10 elements assets, liabilities, equity, investments by owners, distribution to owners, comprehensive income, revenues, expenses, gains, and losses.

Question 26

IASB Framwork Elements of Financial Statements

Answer 26

only 5 elements (FASB SFAC 6 has 10 elements) | assets, liabilities, equity, income, and expenses.

Question 27

First-Time Adoption of IFRS | "date of transition to IFRS"

Answer 27

the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS F/S

Question 28

First-Time Adoption of IFRS | "first IFRS reporting period"

Answer 28

the latest reporting period covered by an entity's first IFRS financial Statements.

Question 29

COGS Formula

Answer 29

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

Question 30

SFAC 6 Defines Allocation

Answer 30

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.

Question 31

Measurement bases included in Financial Accounting

Answer 31

Historical Cost Current Market Value Discounted Cash Flows Replacement Cost

Question 32

Revenue on a franchise agreement

Answer 32

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.

Question 33

Barter Goods

Answer 33

If the goods are similar in nature and value, then no income or expense is recognized.

Question 34

SFAC 5 principle of immediate recognition

Answer 34

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).

Question 35

SFAC 6 "Recognized"

Answer 35

SFAC 6 states that recognition is the process of formally recording or incorporating an item into the financial statements of an entity.

Question 36

For an item to be recognized in the F/S (IFRS)

Answer 36

IFRS requires that it meets the definition of an element and can be measured reliably.

Question 37

The FASB Accounting Standards Codification

Answer 37

Effective 7/1/09 Supersedes all previously issued standards and is the only source of US GAAP. (The most authoritative)

Question 38

Identify the operating procedure for issuing new FASB statements

Answer 38

A new statement is issued after a majority vote of the members of FASB.

Question 39

SFAC 8 states that information provided by financial reporting pertains to

Answer 39

Individual business enterprises rather than to industries or an economy as a whole or to members of society as consumers.

Question 40

If Beginning Inventory is (under)/overstated

Answer 40

cost of sales will be going in the same direction as the beginning inventory

Question 41

If Ending Inventory is (under)/overstated

Answer 41

cost of sales will be going in opposite direction as the beginning inventory

Question 42

3 types of accounting changes

Answer 42

1. Changes in accounting principle 2. Changes in accounting estimate 3. Changes in reporting entity

Question 43

Changes in accounting principle

Answer 43

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.

Question 44

Double declining Depreciation method

Answer 44

1/life of the asset change to percentage and multiply by 2= double declining balance.

Question 45

Restructuring charge

Answer 45

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.

Question 46

Comparative Financial Statements

Answer 46

SEC requires that a 2 year comparative B/S and a 3 year comparative I/S and Statement of CF be presented.

Question 47

Calculate Capital

Answer 47

Beginning Capital + Investments + Income - Drawings = Ending Capital

Question 48

Error Corrections- IFRS overstated sales in PY

Answer 48

Restate the PY F/S presented for comparative purposes.

Question 49

Prior period error under IFRS

Answer 49

Prior period errors include arithmetic mistakes; accounting policy application mistakes; and recognition, measurement, presentation, and disclosure mistakes.

Question 50

Three criteria for a prior period adjustment

Answer 50

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.

Question 51

Change in Accounting Estimates under IFRS

Answer 51

Accounted for prospectively in the period of change and in future periods.

Question 52

When the estimated useful life of the asset is revised.

Answer 52

The unamortized cost should be allocated over the remaining periods of the new useful life.

Question 53

The effect of a change in accounting principle which is inseparable from the effect of a change in accounting estimate

Answer 53

Should be accounted for as a change in accounting estimate, accounted for in the period of change and also in any affected future periods.

Question 54

Changes in accounting principle, IFRS

Answer 54

Changes in accounting principle may occur when the change is required by an IFRS or when it provides reliable and more relevant information.

Question 55

Changes in accounting principle

Answer 55

Change from the use of one generally accepted accounting principle to another generally accepted accounting principle. Retrospective application

Question 56

Changes in estimates

Answer 56

Changes of estimated FS amount based on new information or experience. Prospective

Question 57

Changes in entity

Answer 57

Change that results in the financial statements representing a different entity. Retrospective application

Question 58

Restatement

Answer 58

The process of revising previously issued financial statements to correct an error.

Question 59

Sum of the years Depreciation

Answer 59

n*(n+1)/2 n= useful life of the asset ex. 4 year life, 10,000 4*(4+1)/2=10 4/10*10,000-salvage value

Question 60

Voluntary change in accounting method, under IFRS

Answer 60

A voluntary change in accounting method is given retrospective application by applying the policy as if the new policy had always been applied.

Question 60

Double Declining Balance

Answer 60

(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

Question 61

Reclassification adjustment

Answer 61

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.

Question 62

SEC's regulation S-X

Answer 62

The form and content of F/S to be filed with the SEC.

Question 63

IFRS, interest and dividends received

Answer 63

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.

Question 64

IFRS, interest and dividends received

Answer 64

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.