Becker FAR

Question 1

Accounting Principles Board (APB) Opinions

Answer 1

APB Opinions were published by the Accounting Principles Board from 1959 to 1973. APB Opinions that were not superseded are included in the FASB Accounting Standards Codification.

Question 2

Account Analysis Format

Answer 2

An account analysis format is an analysis format for any balance sheet account. It has the general format of beginning balance, add something, subtract something, and ending balance. An account analysis format can readily be used to solve for any of these four amounts when the others are known or can be calculated. The amounts to be added or the amounts to be subtracted or both may be single or multiple amounts.

Question 3

Accounting Alternative

Answer 3

In 2014, the Financial Accounting Standards Board (FASB) started issuing Accounting Standards Updates (ASUs) that provide simplified accounting alternatives for some or all private companies. These accounting alternatives reflect decisions reached by the Private Company Council (PCC) and endorsed by the FASB. An example is the accounting alternative for goodwill, issued in early 2014.

Question 4

Accounting Research Bulletins (ARB)

Answer 4

Accounting Research Bulletins were published by the AICPA’s Committee on Accounting Procedure from 1939 to 1959. Accounting Research Bulletins that were not superseded are incorporated in the FASB Accounting Standards Codification.

Question 5

Accounts Receivable

Answer 5

Accounts receivable are oral promises to pay debts. They are generally classified as current assets and also either as trade receivables (accounts receivable from purchasers of goods and services) or nontrade receivables (accounts receivable from persons other than customers, such as advances to employees, tax refunds, etc.).

Question 6

Accounts Receivable Turnover

Answer 6

The accounts receivable turnover ratio is sales (net) divided by average accounts receivable (net).

Question 7

Accretion Expense

Answer 7

Accretion expense is the increase in the ARO liability due to the passage of time calculated using the appropriate accretion rate. The accretion expense is added to the ARO liability each period.

Question 8

Accrual Accounting

Answer 8

Accrual accounting is required by U.S. GAAP. Revenues are recognized when the performance obligation is satisfied and expenses are recognized in the same period as the related revenue, not necessarily in the period in which the cash is received or expended by the company.

Question 9

Accrued Vacation

Answer 9

Future compensated absences are accrued if all of the criteria for accrual are satisfied. The criteria include (1) the employee has performed the services to which the vacation or sick pay is attributable; (2) the liability is vested or accumulated; (3) payment is probable; and (4) the amount can be reasonably estimated. The accrual of nonvesting but accumulating sick pay is not required.

Question 10

Accumulated Other Comprehensive Income

Answer 10

Accumulated other comprehensive income is a component of equity that includes the total of other comprehensive income for the current period and previous periods. Comprehensive income for the current period is “closed” to this account. Accumulated other comprehensive income is the parallel to retained earnings for items of other comprehensive income.

Question 11

Acquisition Method

Answer 11

The method used under U.S. GAAP to account for the acquisition of a subsidiary. Under the acquisition method, the acquirer recognizes all acquired assets and liabilities and any noncontrolling interest at fair value.

Question 12

Activity Classification

Answer 12

Activity classification is the classification of governmental expenditures by specific activity. The activity can be an event, a task, or a unit of work with a specific purpose.

Question 13

Additions

Answer 13

In fixed asset accounting, additions increase the quantity or improve the quality of fixed assets and are capitalized.

Question 14

Agency Transaction

Answer 14

Agency transactions consist of resources received by a not‑for‑profit organization over which the organization has little or no discretion or variance power.

Question 15

Allowance Method

Answer 15

Under the allowance method of accounting for bad debts, an estimate is made of the accounts receivable that will be written off and that amount is charged to bad debts expense for the period. The allowance method is GAAP because it matches the bad debts expense to the sales revenue that generated it.

Question 16

Amortization

Answer 16

Amortization is the allocation of the cost of an asset over its useful life. Amortization of fixed assets is called depreciation, and amortization of wasting assets is called depletion.

Question 17

Annual Comprehensive Financial Report

Answer 17

The annual comprehensive financial report includes the basic financial statements and required supplementary information, an introductory section, and a statistical section.

Question 18

Annuity Due

Answer 18

An annuity due (annuity in advance) is an annuity with payments at the beginning of the period.

Question 19

Antidilution

Answer 19

For EPS calculations, the results of an assumed conversion should be used only if it results in dilution (reduces EPS). The results of an assumed conversion should not be used if it is antidilutive (increases EPS).

Question 20

Appropriated Retained Earnings

Answer 20

Appropriated retained earnings is that portion of retained earnings that has been appropriated/designated for some purpose. Appropriations of retained earnings are a means of disclosure, but they do restrict the dividends that can be declared.

Question 21

Asset Group

Answer 21

For discontinued operations reporting, an asset group is a collection of assets to be disposed of together as a group in a single (disposal) transaction and the liabilities directly associated with those assets that will be transferred in that same transaction.

Question 22

Asset Retirement Obligation (ARO)

Answer 22

A legal obligation associated with the retirement of a tangible long-lived asset that results from the acquisition, construction, or development and/or normal operation of a long-lived asset, except for certain lease obligations (minimum lease payment and contingent rentals).

Question 23

Asset Turnover

Answer 23

Asset turnover is sales (net) divided by average total assets.

Question 24

Assets

Answer 24

Assets are probable future economic benefits to be received as a result of past transactions or events. Valuation accounts may be used to show reductions to or increases in an asset that reflect adjustments beyond the historical cost or carrying amount of the asset.

Question 25

Authorized Shares

Answer 25

Authorized shares is the number of shares of common stock that are authorized for a corporation to issue. The number of authorized shares is disclosed.

Question 26

Available-for-Sale Debt Securities

Answer 26

Available‑for‑sale debt securities are those not meeting the definitions of the other classifications (trading or held-to-maturity). Debt securities classified as available‑for‑sale are reported as either current assets or non‑current assets, depending on intent.

Question 27

Held-to-Maturity Debt Securities

Answer 27

Investments in debt securities are classified as held-to-maturity debt securities if the corporation has the positive intent and ability to hold these securities to maturity. If the intent is to hold the security for an indefinite period of time, but not necessarily to maturity, the security would be classified as available-for-sale.

Question 28

Trading Debt Securities

Answer 28

Trading debt securities are those securities that are bought and held principally for the purpose of selling them in the near term. Trading debt securities generally reflect active and frequent buying and selling with the objective of generating profits on short-term differences in price. Securities classified as trading debt securities are normally reported as current assets.

Question 29

Bad Debt Expense

Answer 29

Bad debt expense is the amount charged to income for the period for bad debts. It is also called doubtful accounts expense.

Question 30

Basic Earnings per Share

Answer 30

For an organization with a simple capital structure, the formula for basic earnings per share is the income available to common shareholders divided by the weighted average number of common shares outstanding.

Question 31

Diluted Earnings per Share

Answer 31

Diluted earnings per share is the (income available to the common stock shareholder + interest on dilutive securities) divided by the weighted average number of common shares outstanding assuming all dilutive securities are converted to common stock. The objective of diluted earnings per share is to measure the performance of an entity over the reporting period while giving effect to all potentially dilutive common stock shares outstanding during the period.

Question 32

Treasury Stock Method

Answer 32

For earnings per share calculations, the dilutive effect of options and warrants and their equivalents is applied using the treasury stock method. The treasury stock method assumes that the proceeds from the exercise of stock options, warrants, and their equivalents will be used by the corporation to repurchase treasury shares at the prevailing (or average) market price, resulting in an incremental increase in shares outstanding, but not the full amount of shares that are issued on exercise of the common stock equivalents.

Question 33

Basic Financial Statements

Answer 33

For governmental organizations, the basic financial statements are the government-wide financial statements, the fund financial statements, and the notes to the financial statements.

Question 34

Basket Purchase

Answer 34

A basket purchase is a purchase of two or more assets for a single price. The single price must be allocated to the individual assets purchased.

Question 35

Board-Designated Endowment Fund

Answer 35

An endowment fund created by a not-for-profit entity’s governing board by designating a portion of its net assets without donor restrictions to be invested to provide income for a long but not necessarily specified period. Board‑designated endowments are also referred to as funds functioning as an endowment or quasi‑endowment funds.

Question 36

Bond Indenture

Answer 36

A bond indenture is the contract between a bond issuer/borrower and the bondholders that sets forth the obligations of the issuer and the rights of the bondholders.

Question 37

Bond Issuance Costs

Answer 37

Bond issuance costs are the transaction costs of a bond issue. Examples are legal fees, accounting fees, underwriting commissions, and printing. Under U.S. GAAP, bond issue costs decrease the carrying value of the bond and are amortized using the effective interest method.

Question 38

Bond Selling Price

Answer 38

The bond selling price is the sum of the present value of the future principal amount plus the total present value of the future interest amounts, all discounted at the prevailing effective interest rate. The same procedure is used to value a bond at any other date (not necessarily the date of sale of the bond). Depending on the relationship of the bond’s stated rate to the effective interest rate (at the time, for bonds of similar risk), the bond may sell at a premium or a discount.

Question 39

Book Value per Common Share

Answer 39

Book value per common share measures the amount that common shareholders would receive for each share of common stock if all assets were sold at their book (carrying) values and all creditors were paid.

Question 40

Budgetary Accounting

Answer 40

Budgetary accounting is used to control expenditures and to account for the levy of taxes sufficient to cover estimated expenditures. The major features of budgetary accounting are the use of budgetary accounts and the use of encumbrances.

Question 41

Budgetary Accounts

Answer 41

Budgetary accounts are estimated accounts that are the opposite (in terms of natural debits and credits) from real or actual accounts. Budgetary accounts are normally posted only twice a year—once at the beginning of the year and again at the end of the year.

Question 42

Business (as used in discontinued operations)

Answer 42

An integrated set of activities and assets that is conducted and managed for the purpose of providing a return to investors or other owners, members, or participants.

Question 43

Business-Type Activities

Answer 43

Business-type activities in governmental accounting are normally financed by fees.

Question 44

Call Option

Answer 44

Gives the holder the right to buy from the option writer at a specified price during a specified period of time.

Question 45

Capital Grants

Answer 45

Capital grants are grants for capital expenditures.

Question 46

Capital Grants and Contributions

Answer 46

Capital grants and contributions are mandatory and voluntary non-exchange transactions with other governments, organizations, or individuals that are restricted for use in a particular program for capital expenditures.

Question 47

Capital Projects Fund

Answer 47

Capital projects funds are set up to account for resources used for the acquisition or construction of major capital assets by a governmental unit, except those projects financed by an enterprise fund. See also general fund and special revenue fund and debt service fund and permanent fund and custodial trust fund.

Question 48

Capital Stock

Answer 48

Legal capital is the amount of capital that must be retained by a corporation for the protection of creditors. The par or stated value of both preferred and common stock is legal capital and is frequently referred to as capital stock.

Question 49

Capitalization of Interest Period

Answer 49

The capitalization of interest period is the period during which construction period interest is capitalized. The period begins when expenditures for the asset have been made, when activities necessary to get the asset ready for its intended use are in progress, and when interest costs are being incurred. The period ends when the asset is substantially complete and ready for its intended use.

Question 50

Cash Conversion Cycle

Answer 50

The cash conversion cycle is the length of time between the date of the cash expenditures for production and the date of cash collection from customers (cash to cash). The cash conversion cycle is the days in inventory plus days sales in accounts receivable less days of payables outstanding.

Question 51

Cash Discount

Answer 51

A cash discount is a discount for early payment, generally based on a percentage of the sales price. For example, a discount of 2/10, n/30 offers the purchaser a discount of 2 percent of the sales price if payment is made within 10 days. If the discount is not taken, the entire (gross) amount is due in 30 days. Sales may be recorded either on a gross basis or a net basis with respect to cash discounts.

Question 52

Cash Flow Hedge

Answer 52

A cash flow hedge is a financial instrument designated as hedging exposure to variability in expected future cash flows attributed to a particular risk. Gains/losses on a cash flow hedge are deferred and reported as a component of other comprehensive income until the cash flows associated with the hedged item are realized.

Question 53

Cash-Generating Unit

Answer 53

The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Question 54

Change in Accounting Entity

Answer 54

A change in accounting entity occurs when the entity being reported on has changed composition. Examples include consolidated or combined financial statements that are presented in place of statements of the individual companies and changes in the companies included in the consolidated or combined financial statements from year to year.

Question 55

Change in Accounting Estimate

Answer 55

A change in accounting estimate occurs when it is determined that an estimate previously used was incorrect. Changes in accounting estimate are reported prospectively in the current period and future periods if the change affects both. Note that a change in depreciation method is reported as a change in accounting estimate.

Question 56

Change in Accounting Principle

Answer 56

An accounting principle may be changed only if the alternative principle is preferable and more fairly presents the information. Changes in accounting principle are normally reported using the cumulative effect approach and are reported retrospectively as a change to the opening balance of retained earnings if the cumulative effect can be determined. Changes in accounting principle are reported net of tax.

Question 57

Character Classification

Answer 57

Character classification refers to determining the basis of the fiscal period the expenditures are presumed to benefit. The major character classifications are current expenditures, capital outlays, debt service, and inter-governmental.

Question 58

Cloud

Answer 58

The cloud is the representation in network diagrams of the public switched data network (PSDN). Cloud computing involves information technology as a service rather than as a collection of products. Most carriers offer service-level agreements for transmission within the cloud.

Question 59

Commodity-Backed Bond

Answer 59

A commodity-backed bond (also known as an asset-linked bond) is a bond that is redeemable either in cash or a stated volume of a commodity, whichever is greater.

Question 60

Comparability

Answer 60

Comparability is the quality of information that enables financial statement users to identify similarities in and differences between two sets of economic phenomena. Comparability allows users to compare the information with similar information for other business enterprises.

Question 61

Completed Contract Accounting

Answer 61

Under U.S. GAAP, the completed contract method is used to account for long-term construction contracts when contract costs cannot be reasonably estimated. Under the completed contract method, income is recognized only upon completion of the contract.

Question 62

Complex Capital Structure

Answer 62

A complex capital structure is one that is not a simple capital structure. An entity has a complex capital structure when it has securities that can potentially be converted to common stock and would therefore dilute (reduce) EPS (of common stock).

Question 63

Component of an Entity

Answer 63

For discontinued operations reporting, a component of an entity is a part of an entity (the lowest level) for which operations and cash flows can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the entity. A component of an entity may be an operating segment, a reportable segment (as those terms are defined in segment reporting), a reporting unit (as that term is defined in goodwill impairment testing), a subsidiary, or an asset group.

Question 64

Component Unit

Answer 64

A component unit of a primary government is a legally separate organization for which the elected officials of the primary government are financially accountable. It may also be a separate organization, but its nature and the significance of its relationship with the primary government are such that exclusion of the unit’s financial information would cause the primary government’s financial statements to be misleading or incomplete.

Question 65

Composite Depreciation

Answer 65

Composite depreciation is the process of averaging the economic lives of a number of dissimilar property units and depreciating the entire class of assets over a single life, thus simplifying record keeping of assets and depreciation calculations. It is a specialized depreciation accounting method in which no gain or loss is recognized when one asset of the group is sold or retired.

Question 66

Comprehensive Allocation

Answer 66

Under comprehensive (income tax) allocation, interperiod tax allocation is applied to all temporary differences. The liability method requires that either income taxes payable or a deferred tax liability (asset) be recorded for all tax consequences of the current period.

Question 67

Comprehensive Income

Answer 67

Comprehensive income is the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.

Question 68

Computer Software Developed for Internal Use

Answer 68

Under U.S. GAAP, the cost of computer software developed for internal use only is divided into categories, and the accounting for each category is different. Cost incurred during the preliminary project state and cost incurred for training and maintenance are expensed. Cost incurred after the preliminary project state and for upgrades and enhancements, including the direct cost of materials and services, the cost of employees directly associated with the project, and interest cost incurred for the project are capitalized.

Question 69

Computer Software Development Costs

Answer 69

Under U.S. GAAP, the costs of computer software to be sold, leased, or licensed are separated into categories, and the accounting for each category is different. Costs (coding, testing, and producing product masters) incurred after technological feasibility has been established are capitalized and amortized. Costs incurred to actually produce the software are inventoried. See also technological feasibility.

Question 70

Concentration of Credit Risk

Answer 70

Credit risk is the risk that the other party to a transaction (counterparty) will partially or completely fail to perform. A concentration of credit risk exists if a number of counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Concentrations of credit risk are disclosed.

Question 71

Conditional Promise

Answer 71

A conditional promise to give is a transaction that depends on an occurrence of a future and uncertain event. Recognition does not occur until the conditions are substantially met (or when it can be determined that the chances of not meeting the conditions are remote) and the promise becomes unconditional. Good faith deposits that accompany a conditional promise are accounted for as a refundable advance in the liability section of the statement of financial position.

Question 72

Conservatism Principle

Answer 72

When selecting alternative accounting methods, the method that is least likely to overstate assets (and revenues/gains) and understate liabilities (and expenses/losses) in the current period is selected.

Question 73

Consolidated Financial Statements

Answer 73

Consolidated financial statements represent the results of operations, cash flows, and financial position of a single entity, even if multiple legal entities are involved. The presumption is that consolidated financial statements are more meaningful than parent company financial statements and/or parent company financial statements together with separate subsidiary financial statements.

Question 74

Consolidation

Answer 74

Consolidation is the combination of the financial statements of two or more entities into a single set of financial statements representing a single economic unit. The cost method, the equity method, and consolidation are the three methods of accounting for intercompany investments, depending on the amount of control.

Question 75

Construction Period Interest

Answer 75

Construction period interest is interest incurred during the construction period for a fixed asset or special order goods. Construction period interest during the capitalization of interest period is capitalized.

Question 76

Contingency

Answer 76

An event that may, but is not certain to, occur. A loss contingency that is probable and that can be reasonably estimated should be reflected in the accounts.

Question 77

Contingent Shares

Answer 77

Contingent shares (contingently issuable shares) do not require cash consideration and depend on some future event or on certain conditions being met. Contingent shares (that are dilutive) are also included in the calculation of basic earnings per share if (and as of the date) all conditions for issuance are met. See also basic earnings per share.

Question 78

Contribution

Answer 78

A contribution is an unconditional transfer of cash or assets (collection is certain) to a new owner (title passes) in a manner that is voluntary (the donor is under no obligation to donate) and is nonreciprocal (the donor gets nothing in exchange).

Question 79

Contributions With Donor Restrictions

Answer 79

A contribution may be restricted by the donor. Donor-imposed restrictions limit the use of contributed assets. They are recognized as revenues, gains, and other support in the period received and as assets, decreases of liabilities, or expenses depending on the form of the benefits received. May also be referred to as donor‑restricted support.

Question 80

Contributions Without Donor Restrictions

Answer 80

Unconditional promises to contribute in the future are reported as restricted support (implied time restriction) at the present value of the estimated future cash flows using a discount rate commensurate with the risks involved. If the unconditional promises are expected to be collected or paid in less than one year, they may be measured at net realizable value since that amount is a reasonable estimate of fair value.

Question 81

Contributory Plan

Answer 81

A contributory plan is a plan to which employees are required to contribute.

Question 82

Control

Answer 82

For consolidation purposes, an investor is considered to have parent status when control over an investee is established or more than 50 percent of the voting stock of the investee has been acquired.

Question 83

Conventional Retail Inventory Method

Answer 83

The conventional retail inventory method approximates the results that would be obtained by taking a physical inventory count and pricing the goods at the lower of cost or market. Subtracting the markdowns from the total available for sale results in a lower cost complement percentage, which results in a lower ending inventory. This, in turn, results in an automatic lower of cost or market valuation.

Question 84

Convertible Bond

Answer 84

A convertible bond is convertible into common stock of the debtor (generally) at the option of the bondholder. With a convertible bond, the bond must be surrendered to obtain the common stock.

Question 85

Cost

Answer 85

Cost is an amount (measured in money) expended for items such as capital assets, services (e.g., payroll), and merchandise received. Cost is the amount actually paid for something.

Question 86

Cost Method

Answer 86

An investor accounts for an investment in securities using the cost method if the investor does not have the ability to exercise significant influence over the investee (ownership of less than 20 percent is presumed to be a lack of significant influence). The rules of marketable equity securities are followed and the investment is generally carried at fair value through net income (FVTNI).

Question 87

Cost Method (of Treasury Stock Accounting)

Answer 87

Under the cost method of treasury stock accounting, treasury shares are recorded and carried at their reacquisition cost. A gain or loss is determined when treasury stock is reissued or retired, and the original issue price and book value of the stock do not enter into the accounting. Additional paid-in capital from treasury stock is credited for gains and debited for losses when treasury stock is reissued at prices that differ from the original selling price. Losses may also decrease retained earnings if additional paid‑in capital from treasury stock does not have a balance large enough to absorb the loss. Net income or retained earnings is never increased through treasury stock transactions.

Question 88

Cumulative Effect of Change in Accounting Principle

Answer 88

Most changes in accounting principle are reported using the cumulative effect approach. The cumulative effect is equal to the difference between the amount of beginning retained earnings in the period of change and what the retained earnings would have been if the accounting change had been retroactively applied to all prior affected periods. It includes direct effects and only those indirect effects that are entered in the accounting records. Changes in accounting principle are normally reported using the cumulative effect approach and are reported retrospectively as a change to the opening balance of retained earnings of the earliest year presented if the cumulative effect can be determined. See also change in accounting principle.

Question 89

Cumulative Preferred Stock

Answer 89

Cumulative preferred stock is preferred stock for which the dividends accumulate if they are not declared. No dividends can be paid on the common stock until the cumulative dividends not yet paid are paid. See also preferred stock.

Question 90

Current Assets

Answer 90

Current assets are those resources that are reasonably expected to be realized in cash, sold, or consumed during the normal operating cycle of a business or one year, whichever is longer.

Question 91

Current Cost

Answer 91

Current cost is the cost that would be incurred at the present time to replace an asset, the replacement cost or the lower recoverable amount.

Question 92

Current Exchange Rate

Answer 92

The current exchange rate is the exchange rate at the current date, or for immediate delivery of a currency. It is often referred to as the spot rate.

Question 93

Current Financial Resources Measurement Focus

Answer 93

The current financial resources measurement focus seeks to value and report fund balances as a measure of available, spendable, or appropriable resources. Only current assets and current liabilities are included on the balance sheet. No fixed assets are reported. No non-current liabilities are reported.

Question 94

Current Liabilities

Answer 94

Current liabilities are obligations whose liquidation is reasonably expected to require the use of current assets or the creation of other current liabilities. Obligations for items that have entered the operating cycle are classified as current liabilities. The concept of current liabilities includes estimates or accrued amounts that are expected to be required to cover expenditures within the year for known obligations when the amount can be determined only approximately or where the specific person(s) to whom payment will be made is unascertainable.

Question 95

Current Income Tax Expense

Answer 95

Current income tax expense/benefit is equal to the income taxes payable or refundable for the current year, as determined on the corporate tax return.

Question 96

Current Method

Answer 96

In foreign currency reporting, once all of the financial statements to be reported on are measured in their functional currencies, it is necessary to translate them to their reporting currency (provided that the functional currency is not the reporting currency).

Question 97

Current Ratio

Answer 97

The current ratio is current assets divided by current liabilities.

Question 98

Custodial Trust Fund

Answer 98

Custodial trust funds (or custodial funds) account for resources in the temporary custody of a governmental unit (taxes collected for another governmental entity).