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FAR > Basic Theory - Basic Concepts > Flashcards

Basic Theory - Basic Concepts Flashcards

1
Q

The single source for all US GAAP

A

Accounting Standards Codification (ASC)

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2
Q

Recognition precedes cash receipt/expenditure

A

Accrual

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3
Q

Expenses are recognized as related revenues are recognized

A

Accrual Basis

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4
Q

Recognizes income when cash is received and expenses when cash is disbursed

A

Cash Basis

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5
Q

The amount of cash, or its equivalent, that would be paid if the same asset were to be acquired currently

A

Current Cost

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6
Q

The amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation

A

Current Market Value

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7
Q

Cash receipt/expenditure precedes accrual-basis recognition

A

Deferral

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8
Q

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions

A

Fair Value

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9
Q

The amount of cash, or its equivalent, paid to acquire an asset

A

Historical Cost

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10
Q

Revenue is recognized as cash is collected

A

Installment Sales

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11
Q

The non-discounted amount of cash, or its equivalent, into which an asset is expected to be converted during the normal course of business less direct costs to make the conversion

A

Net Realizable Value

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12
Q

Costs not particularly or conveniently assignable to a product

A

Period Costs

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13
Q

The current measure of an estimated future cash inflow or outflow, discounted at an interest rate for the number of period between today and the date of the estimated cash outflow

A

Present Value

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14
Q

Costs which can be associated with particular sales

A

Product Costs

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15
Q

When related assets received or held are readily convertible into know amounts of cash or claims to cash

A

Realized (Realizable)

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16
Q

Market place participants prefer situations with less uncertainty relative to an expected outcome

A

Risk Adverse

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17
Q

The costs incurred during the course of undertaking on-time activities related to opening a new facility

A

Start-up Costs

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18
Q

SFAC 8 Chapter 8 states the 6 objective of financial reporting. What are they?

A
  1. Information that is useful to potential and existing investors, lenders and other creditors
  2. Information about the reporting entity’s economic resources and claims against the reporting entity
  3. Changes in economic resources and claims
  4. Financial performance reflected by accrual accounting
  5. Financial performance reflected by past cash flow
  6. Changes in economic resources and claims not resulting from financial performance
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19
Q

What are the 2 fundamental qualitative characteristics of accounting information?

A
  1. Relevance

2. Faithful Representation

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20
Q

Financial information is relevant if it has what 3 characteristics?

A
  1. Predictive value
  2. Confirmatory value, or both
  3. Materiality
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21
Q

Requires that information be used to predict future outcomes

A

Predictive Value

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22
Q

Requires that information either confirms or changes prior evaluations

A

Confirmatory Value

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23
Q

Faithful Representation has what 3 characteristics?

A
  1. Completeness
  2. Neutrality
  3. Free from Error
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24
Q

Requires that information is presented or depicted in a way that users can understand the item being depicted

A

Completeness

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25
Q

Requires that the item is depicted without bias either favorable or unfavorably to users

A

Neutrality

26
Q

What are the 4 enhancing qualitative characteristics of accounting?

A
  1. Comparability
  2. Verifiability
  3. Timeliness
  4. Understandability
27
Q

Enables users to identify and understand similarities and differences between items

A

Comparability

28
Q

Refers to the use of the same accounting methods in different periods

A

Consistency

29
Q

Occurs when different sources reach consensus or agreement on a amount of representation of an item

A

Verifiability
Direct - direct observation
Indirect - uses techniques such as checking formulas or recalculation amounts

30
Q

Requires that information is available to a decision maker when it is useful to make the decision

A

Timeliness

31
Q

Involves classifying, characterizing and presenting information clearly and concisely

A

Understandability

32
Q

What are the 2 conceptual views of earnings?

A
  1. Asset-liability View

2. Revenue-Expense View

33
Q

What is the Asset-liability view of earnings?

A

Earnings are measured by the change (other than investments or withdrawals) in the net economic resources of an enterprise during a period. Assets and liabilities are key, revenue, expenses, gains and losses are secondary

34
Q

What is the Revenue-expense View of earnings?

A

Earnings are a measure of an enterprise’s effectiveness in using its inputs to obtain and sell outputs. Revenue and expenses are key.

35
Q

SFAC 5 establishes 4 fundamental recognition criteria. What are they?

A
  1. Definitions
  2. Measurability
  3. Relevance
  4. reliability
36
Q

What are the primary functions of the FASB?

A
  1. Study current issues

2. Generate new accounting standards

37
Q

What is “Fresh-start measurements”?

A

FASB defines it as measurements in periods following the initial recognition that establish a new carrying amount unrelated to previous amounts and accounting conventions

38
Q

What is the FASB procedure for developing accounting standards?

A
  1. FASB identifies a financial reporting issues based on requests/recommendations from stakeholders or through other means
  2. FASB chairman decides whether to add a project to the technical agenda, after consultation with FASB members and others as appropriate and subject to oversight by the Foundation’s board of trustees. The board votes on whether to add the project to its agenda. A simple majority vote is needed
    3 The board deliberates at one or more public meetings the various reporting issues identified and analyzed by the staff
  3. The board issues the Exposure Draft.
  4. The board holds a public roundtable meeting on the draft if necessary
  5. The staff analyzes comment letters, public roundtable discussions and any other information and the Board redeliberates the proposed provisions at public meetings
  6. The board issues an Accounting Standards update by simple majority vote, describing amendments tot he Accounting Standards Codification
39
Q

What type of rules are generally issued by the SEC?

A

Financial Reporting releases that usually agree with US GAAP

40
Q

What are the 4 principles of the IASB?

A

1 to develop a single set of high-quality, understandable, enforceable and globally accepted international financial reporting standards through its standard-setting body, The IASB

  1. to promote the use and rigorous application of those standards
  2. to take account of the financial reporting needs of emerging economies and small and medium sized entities
  3. to bring about convergence of national accounting standards and IFRS to high-quality solutions
41
Q

What is the SEC rulemaking process?

A

Concept release, rule proposal and rule adoption

  1. Concept release is issued describing the area of interest and the SEC’s concerns, usually identifying different approaches to addressing the problem, followed by a series of questions that seek the views of the public on the issue. The public’s feedback is taken into consideration as the SEC decides which approach, if any, is appropriate.
  2. The SEC publishes a detailed formal rule proposal for public comment. Typically between 30-60 days for review and comment
  3. Finally, the SEC commissioners consider what they have learned from the public exposure of the proposed rule and seek to agree on the specifics of a final rule. If a final measure is then adopted by vote of the full commission, it becomes part of the official rules that govern the securities industry
42
Q

What is comprehensive income?

A

Net income plus “other comprehensive income items” such as foreign currency translations gains and unrealized gains on available for sale equity securities. Extraordinary gain is included in net income, not comprehensive income

43
Q

SFAC 4 observes that nonbusiness organizations generally have no single indicator of performance such as profit, net income, etc. and suggests 2 performance indicators for nonbusiness organizations. What are they?

A
  1. information about the nature and relationship between inflows and outflows of resources
  2. information about service efforts and accomplishments
44
Q

What are cash equivalents?

A

Short-term, highly liquid investments that:

  1. are readily c?onvertible to know amounts of cash and
  2. are so near maturity that they represent insignificant risk of changes in value due to changes in interest rates (generally 3 mos or less)
45
Q

Cash may be categorized into 2 classes. What are they?

A

Unrestricted cash and restricted cash

46
Q

What is unrestricted cash?

A

Cash available for current operations.

47
Q

What is restricted cash?

A

Cash not designated or available for use in current operations. Ex: sinking funds, retirement of LT debt

48
Q

When a full set of general purpose FS are presented, comprehensive income and its components should:

A

be displayed in a FS that has the same prominence as other FS

49
Q

How is revenue and expenses recognized on the cash basis of accounting?

A

revenue is recognized when cash is received and expenses are recognized when cash is disbursed. No income or expense is accrued

50
Q

The cash basis of accounting is not allowed under GAAP unless what is true?

A

There is no material difference from the accrual method

51
Q

When can the cash basis of accounting be used?

A
  1. preparation of tax returns
  2. sometimes provided to investors or creditors. Cash basis results in a measure similar to net income called net operating cash flow. Net operating cash flow is the difference between cash receipts and cash disbursements
52
Q

What is the modified cash basis method of accounting?

A

It combines features of both the cash and accrual basis.

53
Q

Under the modified cash basis method of accounting, what are some modifications to the cash basis accounting?

A
  1. capitalization of assets
  2. accrual of income taxes
  3. depreciation expense
54
Q

What is the intention of the modified cash basis of accounting?

A

To provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP

55
Q

The modified cash basis does not comply with GAAP unless what is true?

A

There are no material differences in this method and GAAP

56
Q

List 4 common current liabilities

A
  1. obligations for items that have entered into the operating cycle
  2. collections received in advance of the delivery of goods or performance of services
  3. debts arising from operations directly related to the operating cycle (e.g. accruals for wages, salaries, commissions, rentals, royalties and income)
  4. other liabilities whose regular and ordinary liquidation is expected to occur within one year
57
Q

How are obligations that due on demand recorded on the balance sheet?

A

as a current liability

58
Q

Current liabilities may also include long-term obligations that are or will be callable by the creditor because the debtor has violated a covenant in the debt agreement that…

A
  1. makes the obligation callable
  2. will make the obligation callable if the violation is not cured within a specified grace period. If such a violation exists, the related debt must be classified as current unless either:
    1. the creditor has waived or, subsequent to the violation, has lost the right to demand payment (eg - because the violation has been cured) for more than one year (or operating cycle, if longer) from the balance sheet date or
    2. it is probable that the violation will be cured within the specified grace period, if one exists
59
Q

Short term obligations may be excluded from current liabilities if what 2 things are true?

A
  1. intends to refinance the obligation on a long-term basis AND
  2. demonstrates the ability to consummate the refinancing
60
Q

Refinancing a short term obligation on a long-term basis means what 2 things.

A
  1. replacing it with a long-term obligation or equity securities OR
  2. renewing, extending, or replacing it with short-term obligations for an uninterrupted period extending beyond one year (or the operating cycle, if applicable) from the date of an enterprise’s balance sheet
61
Q

The ability to consummate the refinancing may be demonstrated in either 2 ways. What are they?

A
  1. by actual issuance of a long-term obligation or equity security after the balance sheet date, but before the balance sheet is issued, for the purpose of refinancing the short-term obligation
  2. by entering into a financing agreement, before the balance sheet is issued, that clearly permits the enterprise to refinance the short term obligation on a long term basis on term that are readily determinable

FAR (30 decks)

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