Basic Theory and Financial Reporting

Question 1

Basic Theory and Financial Reporting

What are the enhancing qualitative characteristics of financial reporting?

Answer 1

The enhancing qualitative characteristics of financial reporting are

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 2

Basic Theory and Financial Reporting

What are the Fundamental Qualitative characteristics of relevance?

Answer 2

Fundamental Qualitative characteristics of relevance

1. Predictive value
2. Confirmatory value

Question 3

Basic Theory and Financial Reporting

What are the Fundamental Qualitative characteristics of Faithful representation?

Answer 3

Fundamental Qualitative characteristics of Faithful Representation

1. Complete
2. Neutral
3. Free from error

Question 4

Basic Theory and Financial Reporting

True or False
Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

Answer 4

True
Comprehensive income includes all changes in equity during a period EXCEPT those resulting from investments by owners and distributions to owners.

Question 5

Basic Theory and Financial Reporting

True or False
Statements of earnings and comprehensive income together indicate the extent to which and the ways in which the equity of the entity increased or decreased from all sources other than transactions with owners during the period.

Answer 5

True
Statements of earnings and comprehensive income together indicate the extent to which and the ways in which the equity of the entity increased or decreased from all sources other than transactions with owners during the period.

Question 6

Basic Theory and Financial Reporting

Which statements are usually included in a set of personal financial statements?

Answer 6

The basic set of personal financial statements includes

(1) a statement of financial condition that presents assets and liabilities at estimated current values on an accrual basis where personal net worth is the difference between total assets and liabilities
(2) a statement of changes in net worth (optional) that shows sources of increases and decreases in net worth.

Question 7

Basic Theory and Financial Reporting

Disclosure is required by publicly held companies if 10% or more of total revenues are derived from?

Answer 7

FASB ASC 280-10-50-12 requires that public companies disclose if 10% or more of total revenues come from sales to single customers or from export sales.

Question 8

Basic Theory and Financial Reporting

True or False

Cash which is “restricted as to withdrawal or use” should not be included in current assets.

Answer 8

True

Cash which is “restricted as to withdrawal or use” should not be included in current assets.

Question 9

Basic Theory and Financial Reporting

According to GAAP, which of the following financial statements must be filed by employee benefit plans and trusts?

Answer 9

Employee benefit plans and trusts must prepare two financial statements according to GAAP:

1. A statement of net assets available for benefits of the plan as of the end of the plan year
2. A statement of changes in net assets available for benefits of the plan for the year then ended

Question 10

Basic Theory and Financial Reporting

True or False

Interest is a cash outflow that is classified as an operating activity.

Answer 10

True

Interest is a cash outflow that is classified as an operating activity.

Question 11

Basic Theory and Financial Reporting

What are the components of other comprehensive income?

Answer 11

Three categories of elements of other comprehensive income exist:

1. Unrealized gains and losses on available-for-sale investments
2. Foreign currency items
3. Changes in unrecognized prior service costs, unrecognized gains and losses, and unrecognized transition assets or obligations related to defined benefit pension plans and defined benefit other postretirement plans

Question 12

Basic Theory and Financial Reporting

Describe the relationship of net income and comprehensive income

Answer 12

The relationship of net income and comprehensive income can be shown as follows:

Net Income + Other Comprehensive Income = Comprehensive Income

Question 13

Basic Theory and Financial Reporting

Describe the process for the installment method for sales.

Answer 13

In the installment method, gross profit is deferred at the time of sale and is recognized by applying the GP rate to subsequent COLLECTIONS.

Question 14

Basic Theory and Financial Reporting

Describe the five elements for the IASB framework

Answer 14

The five elements for the IASB framework

Asset, liability, equity, income, expense

Question 15

Basic Theory and Financial Reporting

Describe other comprehensive income

Answer 15

Other comprehensive income includes revenues, expenses, gains, and losses that, in accordance with generally accepted accounting principles, are included in comprehensive income but excluded from net income.

Question 16

Basic Theory and Financial Reporting

Describe the Price/ Earnings ratio

Answer 16

The price-earnings ratio is P/E = Stock price ÷ EPS (earnings per share).

Question 17

Basic Theory and Financial Reporting

How is a change in accounting estimate accounted for in the financials?

Answer 17

A change in accounting estimate is accounted for in (a) the period of change if the change affects that period only or (b) the period of change and future periods if the change affects both.

Question 18

Basic Theory and Financial Reporting

What are the three ways to measure the present fair value of an impaired loan?

Answer 18

There are three ways to measure the present fair value of an impaired loan and they are listed in FASB ASC 310-10-35-22:

1. The present value of the expected future cash flows from the loan discounted at the loan’s original effective rate
2. The amount the loan could be sold for
3. The net realizable value of the available loan collateral

Question 19

Basic Theory and Financial Reporting

When do subsequent events take place?

Answer 19

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.

Question 20

Basic Theory and Financial Reporting

What is the difference in financial presentation between unrealized gains or losses vs. realized gains or losses

Answer 20

Unrealized G/L- Other Comprehensive Income

Realized G/L - Include in Net Income

Question 21

Basic Theory and Financial Reporting

When is it necessary to disclose significant estimates in the financial statements?

Answer 21

Disclosure of these significant estimates must be made when both of the following conditions are present (FASB ASC 275-10-50-8):
•It is at least reasonably possible that the estimate of the effect on the financial statements will change in the near term due to one or more future confirming events (reasonably possible is the chance is more than remote but less than likely).
•The effect of the change would be material.

Question 22

Basic Theory and Financial Reporting

Describe the hybrid method

Answer 22

The hybrid method is a combination of the cash and accrual methods. Generally, a company using the cash method must use the accrual method for the accounts involved in computing cost of goods sold and gross profit if inventory is a material income-producing factor. The cash method can be used for all other accounts.

Question 23

Basic Theory and Financial Reporting

Assume a firm elects to early adopt ASU 2015-01 (Extraordinary and Unusual Items). The extraordinary item presentation ( Net of tax)

Answer 23

Has been eliminated

Question 24

Basic Theory and Financial Reporting

Assume a firm elects to early adopt ASU 2015-01 (Extraordinary and Unusual Items). Unusual and infrequently occurring events are reported

Answer 24

As a separate line item within income from continuing operations.

Question 25

Basic Theory and Financial Reporting

If the Fair value option is not elected, HTM securities are reported at?

Answer 25

If the Fair value option is not elected, HTM securities are reported at amortized cost.

Question 26

Basic Theory and Financial Reporting

True or False

Under the completed contract method, an expected loss on a contract must be recognized in full in the period in which it is discovered.

Answer 26

True

Under the completed contract method, an expected loss on a contract must be recognized in full in the period in which it is discovered.

Question 27

Basic Theory and Financial Reporting

What is the percentage of completion gross profit formula?

Answer 27

(Costs to date-Total Estimated Costs) x Estimated profit = Gross Profit TO DATE

Question 28

Basic Theory and Financial Reporting

When is accrual and disclosure of a loss contingency required?

Answer 28

FASB ASC 450-20-25-2 requires accrual of a loss contingency when a loss is probable and the amount of such loss can be reasonably estimated.

When a loss is not accrued because of the absence of one or both of these conditions, but a loss is reasonably possible, a loss contingency should be disclosed but not accrued.

Question 29

Basic Theory and Financial Reporting

Describe the relationship between Installment sales and Deferred Gross Profit

Answer 29

Installment sales = Deferred gross profit
———————
Gross profit margin

Question 30

Basic Theory and Financial Reporting

Describe the relationship between Realized Gross Profit and Cash Collections

Answer 30

Realized gross profit = Gross profit margin x Cash collections

Question 31

Basic Theory and Financial Reporting

What are the two types of subsequent events that must be recognized in the Financial Statements?

Answer 31

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. Under FASB ASC 855-10, there are two types of subsequent events:

The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events).
The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events).

Question 32

Basic Theory and Financial Reporting

Describe the Financial Reporting Framework for Small and Medium Sized Entity Framework (FRF for SME)

Answer 32

1. Developed by the AICPA
2. Not GAAP
3. Has no authoritative status
4. Simplifies reporting for small companies

Question 33

Basic Theory and Financial Reporting

When the right of return exists, what are the six conditions that need to be met before revenue is recognized?

Answer 33

When the right of return exists, revenue is recognized by the seller when the following conditions are met (FASB ASC 605-15-25-1):

a. The seller’s price is substantially fixed or determinable at the date of the sale.
b. The buyer has paid the seller; or the buyer is obligated to pay the seller, and this obligation is not contingent on the resale of the products.
c. The buyer’s obligation is not changed in the event of theft or destruction of the products.
d. The buyer has economic substance apart from the seller.
e. The seller does not have significant obligations for future performance to directly bring about resale of the products.
f. The amount of future returns can be estimated.

Question 34

Basic Theory and Financial Reporting

List the installment method calculations of annual gross profit:

Answer 34

Installment method calculations of annual gross profit:

1. Compute total expected gross profit by subtracting cost of goods sold from the installment sale amount.
2. Compute the percentage gross profit rate by dividing total gross profit by sale amount.
3. For each period, multiply CASH COLLECTED times the gross profit percentage in the period the sales were made to get that period’s gross profit.
4. The net result is that gross profit is recognized in proportion to cash collected.

Question 35

Basic Theory and Financial Reporting

List the multiple classification schemes in governmental accounting.

Answer 35

In governmental accounting, expenditures should be recorded in a multiple classification scheme—typically by

(1) fund
(2) function or program
(3) organizational unit (e.g., department)
(4) activity
(5) character
(6) object (“object of expenditure”).

Question 36

Basic Theory and Financial Reporting

How are voluntary changes in accounting principle recognized?

Answer 36

Voluntary changes in accounting principle be recognized using the retrospective approach, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented.

Question 37

Basic Theory and Financial Reporting

Define subsequent events

Answer 37

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.

Question 38

Basic Theory and Financial Reporting

True or False

IFRS is more principles-based than U.S. GAAP.

Answer 38

True

IFRS is more principles-based than U.S. GAAP.

Question 39

Basic Theory and Financial Reporting

True or False

A valuation account is considered a liability

Answer 39

False

A valuation account is neither an asset nor a liability

Question 40

Basic Theory and Financial Reporting

What are the conditions for accrual?

Answer 40

The conditions for accrual are
1. The amount of the loss can be reasonably estimated

and

2. It is probable that an asset had been impaired or a liability has been incurred.