Basic Theory & Financial Reporting

Question 1

Realization

Answer 1

the process of converting non-cash resources into money through the sale of assets for cash or claims to cash

Question 2

Comprehensive Income

Answer 2

Measures the return of financial capital. Includes: changes in market values of investments in marketable equity securities classified as available-for-sale.

Question 3

Asset Measurement

Answer 3

Historical cost: PP&E and most inventories, short-term payables

Current cost: some inventories

Current market value: some investments (available for sale securities, trading securities)

Net realizable (settlement value): short-term receivables and some inventories, warranty obligations

Present (discounted) value of future cash flows: long-term receivables

Question 4

FASB Codification

Answer 4

Includes all level A-D GAAP:

FASB authoritative literature

Emerging Issues Task Force

Accounting Principles Board Opinions Accounting Research Bulletins

Accounting Principles Board Opinions Accounting Interpretations

AICPA Statements of Position AICPA Audit and Accounting Guides AICPA Practice Bulletines

Question 5

Accounting Qualities

Answer 5

Question 6

Revenue Recognition

Answer 6

Requires:

1. a fixed or readily determinable price
2. Buyer has paid or is obligated to pay, with no contingency on resale
3. Buyer’s obligation remains unchanged in the event of damage or destruction
4. Buyer is independent from the seller
5. Seller does not have significant obligations regarding resale
6. Amount of future returns can be reasonably estimated

Methods:

Point of sale

During Production (percentage-of-completion)

Completion-of-production (net realizable value)

Cash Collection

Agricultural exception (agricultural products that are homogenous and have an immediate marketability at quoted prices - revenue is recorded at time of agreed sale)

Question 7

Deposit Method (real estate)

Answer 7

Payments are recorded as a liability pending:

1. until sale is consummated
2. if buyer’s initial and continuing investments are not adequate to demonstrate a commitment to pay or the property and the seller is not reasonably assured of recovering the cost of the property.

Question 8

Reduced profit method (real estate)

Answer 8

a portion of the profit is recognized at the time of sale, with remaining to be recognized in future periods.

current year profit = gross profit - present value of receivable

Used when initial investment is adequate to demonstrate a commitment to pay for the property but the continuing investments are not.

Question 9

Qualitative Characteristics

Answer 9

Fundamental

A) Relevance: Predictive Value, Conformatory Value

B) Faithful Representation: Complete, Neutral, Free from Error

Enhancing

A) Comparability

B) Verifiability

C) Timeliness

D) Understandability

Question 10

Accrual / Deferral

Answer 10

Accrual:

Revenue - earned, not received

Expense - incurred, not paid

Deferral:

Revenue - cash received, revenue not earned

Expense - cash paid, expense not recognized

Question 11

Error Correction

Answer 11

An error in the financial statemens is treated as a prior period adjustment by restating the prior period financial statements.

Financial statements for each period are adjusted to reflect the correction of the period-specific effects of the error.

Cumulative effect of the error is reflected in the carrying value of asets and liabilities at the beginning of the first period presented, with an offsettng adjustment to the opening balance in retained earnings.

Question 12

Changes in Accounting Principle

Answer 12

accounted for through retrospective application of the new principle to all prior periods, unless impracticable

cummulative effects of change are presented in the carrying amounts of assets and liabilitys as of the beginning of the first period present

offsetting adjustment is made to the opening balance of retained earnings

statements for each prior period presented are adjsuted to reflect the period-specific direct effects

footnote required

Question 13

Restatement

vs

Retrospective Application

Answer 13

restatement: process of revising previously issed financial statements to correct an error

retrospective application: application of a different accounting principle to previously issued financial statements as if the principle had always been used. (changes in accounting principle, changes in reporting entity)

Question 14

Change in Accounting Estimate

Answer 14

accounted for on the prospective basis (financial statments are not restated)

effect of change is reported asa component of income from continuing operations, in the period of change and future periods if both are affected

Question 15

SEC Reporting Requirements

Answer 15

Regulation S-X: describes form and content of financial satements to be filed with the SEC

Regulation S-K: describes the requirements for invormation and forms required by S-X

Regulation AB: describes reporting requiremtns for asset-backed securities

Regulation Fair Disclosure (FD): mandates publically traded companies disclose material information to all investors simultaneously

Form S-1/F-1: registration statement

Schedule 14A: proxy statement

Question 16

Debt Restructure

Answer 16

1. Settlment of debt:
   a) debtor and creditor account for fair values of assets transferred. Gain or loss is recognized on the asset transferred
2. Restructuring
   a) debtor accounts modification as a reduction in interest expense from the date of restructure until maturity. Gains and losses generally not recognized unless total future cash payments of new terms are less than recorded amount of debt
   b) creditor accounst for restructuring using original effective rate to measure losses.

Prestructured carrying amount (balance + accrued interest)

less PV future cash flows

loss on impairment (Bad Debt Expense)

Record change in receivable, interest receivable, and bad debt expense - plug to valuation allowance