Becker MCQ Flashcards
1
Q
what characteristic represents information is reasonably free from error and bias?
A
faithful representation
2
Q
the objectives of financial reporting stem from what source?
A
the needs fo the external users (lenders, creditors, investors) of the information
-because the primary objective is to provide information that is useful for economic decision making
3
Q
the concept of faithful representation includes
A
neutrality, completeness, and freedom from error
4
Q
the concept of the term relevance includes
A
predictive value, confirming value, and materiality
5
Q
what is the most authoritative source of US GAAP?
A
FASB accounting standards codification
6
Q
which qualitative characteristic does interim financial statements emphasize?
A
timeliness
-provides financial information based on actual performance to date and estimates prior to year end
7
Q
is the FASB responsible for prescribing standards related to internal control?
A
no
8
Q
what is a current replacement cost?
A
acquiring new and substantially equivalent property at current prices, adjusted for estimated depreciation since acquisition
9
Q
what is a current reproduction cost?
A
producing new and substantially identical assets, at current prices, adjusted for depreciation to date
10
Q
when is using the historical cost appropriate?
A
when operations are continuing
11
Q
financial information provided in general purpose financial reports should include
A
information about the resources of the entity, the claims against the entity, and how effectively and efficiently the entity’s management and governing board have discharged their responsibilities to use the entity’s resources
-NOTE: shareholder’s don’t have the responsibility to use the entity’s resources
12
Q
four enhancing qualitative characteristics
A
comparability, verifiability, timeliness, and understandability
-these enable relevant, faithfully represented information to be more useful
13
Q
gains and losses are reported using which concept
A
net, showing the gain or loss as part of continuing operations, not net of income taxes
14
Q
under US GAAP, a material transaction that is “infrequent in occurrence” and/or “unusual in nature” should be presented separately as a component of income from continuing operations when
A
the transaction results in a gain or loss
15
Q
when a transaction is expected to result in the realization of cash in the future, what is the payment classified as?
A
asset
16
Q
when cash will be realized at a time beyond the normal operating cycle or one year, what is cash classified as?
A
noncurrent asset
17
Q
when cash is refundable within the next year or operating cycle, whichever is longer, what is cash classified as?
A
current asset
18
Q
what is the definition of an expense?
A
reduction of an asset or an increase in a liability over a period of time
19
Q
when a fixed asset is sold, gain or loss is recognized as part of income from continuing operations. what is the formula for the amount of gain or loss?
A
proceeds from the sale - carrying amount of the fixed asset sold
20
Q
what is included in the single-step income statement?
A
total revenue of all sales of goods, services, and rentals
-purchase discounts are not included, they reduce COGS
21
Q
what line item is shown before considering income tax effects when preparing an income statement?
A
income (loss) from operations
22
Q
when a customer pays an annual fee in advance, when should the company recognize the related revenue under US GAAP?
A
evenly over the contract year as the services are performed
23
Q
what is the definition of a deferred revenue?
A
liability until the service has been performed
24
Q
collections received for service contracts should be recorded as an increase in a
A
unearned service revenue account
25
when service contracts are sold, what happens to deferred revenue and service revenue?
deferred revenue increases, service revenue doesn't increase until services are performed
26
when can a contract modification occur?
change in the price of scope of a contract approved by both parties
27
what is an output method used to recognize revenue?
milestones achieved (production or distribution related)
28
what is an input method used to recognize revenue?
resource consumption, labor hours expended, costs incurred to total expected costs
29
percentage of completion method formula
(total cost incurred/total expected cost)*(total expected gross profit) - total gross profit previously recognized
30
when would a financing arrangement be booked?
when the repurchase price is equal to or greater than the original sale price and the expected market value
31
when is revenue recognized for the completed contract method with a long term construction contract?
revenue is recognized when the job is completed
32
the earliest period that a component of an entity can be reported in discontinued operations is when the component meets the "held for sale" criteria:
1. management commits to plan to sell the component
2. the component is available for immediate sale in its present condition
3. an active program to locate a buyer has been initiated
4. the sale of the component is probable and the sale is expected to be completed within one year
5. the sale of the component is being actively marketed
6. it is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn
33
when there is a change in the reporting entity, how should the change be reported in the financial statements?
retrospectively, including note disclosures, and application to all prior period FS presented
34
how should the effect of a change in accounting estimate be accounted for?
in the period of change and future periods if the change affects both (current and subsequent periods, NOT prior periods or RE)
35
the correction of an error in the financial statements of a prior period should be reported:
net of tax, in the current statement of RE as an adjustment of the opening balance
36
if it is impossible to determine whether a change in accounting estimate or principle has occurred, the change should be considered a change in:
estimate; which is reported prospectively as a component of income from continuing operations
37
what is included in comprehensive income?
all components of net income and "other comprehensive income"
-items included: foreign currency items, changes in the funded status of a pension plan, unrealized gains and losses on available for sale debt securities, derivative instruments designated as cash flow hedges (aka instrument specific credit risk), sales revenue
-does NOT include investments by stockholders or distributions/dividends to stockholders
38
what is the purpose of reporting comprehensive income?
to summarize all changes in equity from non-owner sources
39
how is comprehensive income presented?
-statement of income and comprehensive income below net income, or
-statement of comprehensive income that is separate
**income tax expense or benefit allocated to components must be disclosed either on the face of the statement or in the notes to the statement
40
where is accumulated OCI reported?
the statement of financial position
41
what is the royalty expense rule?
large of minimum royalties or 10% of sales
42
when should revenue be recognized?
in the period in which they are earned or realized/realizable
43
when should expenses be recognized?
when an entity's economic benefits are used up in delivering or producing goods, rendering services or other activities that constitute its ongoing major or central operations
44
what accounts are recognized when services are provided (like advertising) but the company hasn't benefited (like from travel or lodging) yet
an asset and a revenue is recognized
45
what is included in the disclosures for a summary of significant accounting policies?
-measurement bases used in preparing the financials statements
-specific accounting principles and methods used during the period (basis of consolidation, depreciation methods, amortization of intangibles, inventory pricing, use of estimates, fiscal year definition, special revenue recognition issues)
-criteria for determining which investments are treated as cash equivalents (MC question repeated a lot)
-changes in stockholder equity as well as any other information about significant asset/liability accounts
46
what is the purpose of information presented in notes to the financial statements?
to provide disclosures required by GAAP
-SFAC 5 paragraph 7
47
what is NOT included in the disclosures for a summary of significant accounting policies?
-composition and detailed dollar amounts of account balances
-details relating to changes in accounting principles
-dates of maturity and amounts of LT debt
-yearly computation of depreciation, depletion and amortization
48
disclosure of vulnerability to concentration is required if all of the following criteria are met:
-the concentration exists as of the financial statement date
-the concentration makes the entity vulnerable to the risk of a near term severe impact
-it is at least reasonably possible that the events that could cause a severe impact from the vulnerability will occur in the near term
49
with regard to subsequent events and knowing the amount of the settlement, do you record and disclose?
yes
50
when the estimated financial impact is known for a subsequent event, do you disclose the nature of the event and the estimated impact?
yes
51
for purposes of determining the period over which subsequent events must be evaluated, financial statements are considered to be "available to be issued" when
-the financial statements are in a form and format that comply with GAAP
-all approvals necessary for the issuance of the financial statements have been received
52
if an entity doesn't file its financial statements with the SEC, what date do they follow for subsequent events?
date the financial statements are available to be issued
53
for purposes of determining the period over which subsequent events must be evaluated, financial statements are considered to "issued" when
-the financial statements are in a form and format that comply with GAAP
-the financial statements have been widely distributed to financial statement users
54
if an entity files it's financial statements with the SEC, what is their requirement for disclosures with subsequent events?
not required to disclose the date through which subsequent events have been evaluated
55
what does it mean when it says "there is no principal market" for fair value?
-the price in the most advantageous market (best price after considering transaction costs) is the fair value of the stock
-so aka just the quoted price
-if comparing more than one market, pick the higher market price after considering transaction costs and use their quoted price as the fair value of the asset
56
level 1 input
quoted price in an active market for the identical asset or liability
57
level 2 input
inputs other than quoted market prices that are either observable or unobservable
-applying fair value based on similar asset's value
58
level 3 input
unobservable inputs for the asset or liability, reflecting the entity's judgment about the assumptions that a market participant would use
-ex: projected cash flows
59
fair value definition
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date
-market based measure
-includes transportation costs
-apply fair value on an instrument-by-instrument basis
60
market approach
uses prices and other relevant information from market transactions involving identical or comparable assets/liabilities to measure fair value
61
income approach
converts future amounts, including cash flows or earnings, to a single discounted amount to measure fair value
62
cost approach
uses current replacement cost to measure the fair value of assets
63
changing from the cost approach to the market approach of measuring fair value is considered what type of accounting change?
change in accounting estimate
64
what is a market participant?
buyers and sellers acting in their economic best interests who are independent (not related parties), who are knowledgeable about an asset or liability, and are willing and able to transact for that asset or liability
65
what is the principal market?
market with the greatest volume of activity for the particular asset for which fair value is being determined
66
what type of entity is required to report on business segments?
publicly traded enterprises
67
an enterprise must separately report information about an operating segment when the segment's revenue meets what minimum percentage of the combined revenue of all reported operating segments?
-10% size test is the quantitative threshold
criteria applicable
-reported revenue greater than or equal to 10% of combined revenue (unaffiliated and intersegment) of all operating segments
-reported profit/loss greater than or equal to 10% of the greater of: combined profit of all operating segments that did not report a loss OR combined reported loss of all operating segments that did report a loss
-assets greater than or equal to 10% of the combined assets of all operating segments
68
what items are not included in segment profit?
-equity in NI of another company, general corporate expenses, interest, income tax expense, and gains or losses on discontinued operations
-CAN be included in the determined of segment profit reported to the "chief operating decision maker"
69
do unaffiliated customer sales and intracompany sales be disclosed separately for reporting segments?
yes
70
operating profit formula
sales - traceable operating expenses
71
what is an annual report that is filed with the US SEC?
form 10-k
72
gain rule for sale of fixed assets
the entire amount of the gain or loss from sale of fixed assets should be reported during the period (quarter) incurred
73
what is an annual report that is filed by non US registrants registered with the SEC?
form 20-f
74
what is an annual report filed by specific Canadian companies registered with the SEC?
form 40-f
75
what report would a company file to meet the US SEC requirements for unaudited, interim financial statements reviewed by an independent accountant?
form 10-q
76
what form should be used for major corporate events, such as corporate asset acquisitions/dispositions, accountant changes, financial statement changes, management changes, changes in securities?
form 8-k
77
what is XBRL?
-eXtensible business reporting language
-utilizes a taxonomy with tags that identify and define data found within the financial statements and supporting footnotes
-include balance sheet, statement of comprehensive income, footnotes, and any applicable financial statement schedules
-required to be submitted with form 10-k, 20-f, and 6-k
78
US SEC regulations for financial statement presentation and disclosure requirements of SEC filings can be found in:
-regulation S-X
-this sets fourth the form and content of and requirements for interim and annual financial statements to be field with the SEC
-should include balance sheets for the two most recent fiscal years
-should include statements of income, changes in owners equity, and cash flows for the three fiscal years preceding the date of the most recent audited balance sheet
79
what is form 3, 4, and 5?
-required to be filed by directors, officers, or beneficial owners of more than 10% of a class of equity securities of a registered company
-do not contain the registered company's financial statements because they are not filed with the company, and aren't required to present the company's financial statements in an exhibit prepared using XBRL
80
what is a form 11-k
annual report of an entity's employee benefit plan and would include the financial statements of the benefit plan
81
for large accelerated and accelerated filers, what is the latest date that the 10-q should be filed with the US SEC?
40 days of the period end
-so if the quarter ends March 31, the 10-q would be due May 10 at the latest
82
for small corporations, what is the latest date that the 10-q should be filed with the US SEC?
45 days after the end of the quarter
83
for large accelerated filers, what is the latest date that the 10-k should be filed with the US SEC?
due 60 days after the end of the fiscal year
84
for accelerated and accelerated filers, what is the latest date that the 10-k should be filed with the US SEC?
75 days
85
what is an accelerated filer?
-issuer with a public float of greater than or equal to $75M
-issuer subject to the security exchanges act reporting requirements for greater than or equal to 12 months
-issuer that previously filed at least one report
-issuer which is not eligible to file quarterly and annual reports on form 10-qsb and 10-ksb
86
presentation guidelines for other comprehensive basis of accounting (OCBOA) financial statements:
-financial statement titles should differentiate OCBOA financial statements from accrual basis financial statements
-should be similar to GAAP financial statement disclosures
-should include financial statements equivalent to the accrual basis balance sheet and income statement
87
what is a special purpose framework?
-non GAAP presentations that include other bases of accounting, like cash basis (statement of cash receipts and disbursements) and modified cash basis (recording LT liabilities, accrual of income taxes, capitalization of inventory)
88
what basis is the statement of financial position?
accrual basis financial statement prepared by a not for profit organization
89
converting cash basis revenue to accrual basis revenue
start with cash basis revenue (cash receipts from customers from cash basis income statement)
+ending AR (revenue earned during period but not yet collected from customer)
-beginning AR (cash collected during current period that was earned in prior periods)
-ending unearned (or deferred) revenue (cash collected during current period that will not be earned until future periods)
+beginning unearned (or deferred) revenue (cash collected in prior periods that was earned in current period)
**unearned/deferred revenue can also be stated as contract liability
90
income tax basis financial statements differ from those prepared under GAAP in that income tax basis financial statements:
recognize certain revenues and expenses in different reporting periods
-income tax basis recognize events when taxable income or deductible expenses are recognized on the entity's tax return
-non taxable income and non deductible expenses are shown on the financial statement and included in determination of income (and become M1 adjustments to arrive at taxable income)
91
what does a net decrease in AR mean?
-cash collected exceeds revenue recognized on the accrual basis
-higher cash basis income than accrual basis income (which is NOT understating income)
92
what does a net decrease in accrued expenses mean?
-cash paid to reduce accrued expenses was more than the accrual basis expense recorded
-higher expense under the cash basis than under the accrual basis (which IS understating income)
93
accrual basis - calculating revenue - "BASE"
-beginning balance
-plus additions (do prior year-current year but absolute the value)
-subtract whatever is needed
-ending balance
94
when do you recognize revenue and expenses for accrual basis?
-revenue is recognized when earned/realizable or realized (AR)
-expense is recognized when incurred/owed/benefit received (AP)
95
when do you recognize revenue and expenses for cash basis?
-revenue is recognized when cash is received
-expenses are recognized when cash is paid
96
converting cash paid for purchases to COGS
start with cash paid for purchases (from cash basis income statement)
+ending AP (expenses incurred during period but not yet paid)
-beginning AP (expenses incurred during prior period and paid in current period)
-ending inventory (purchases made during current period not yet sold)
+beginning inventory (purchases made in prior period that were sold during current period)
97
converting cash paid for operating expenses to accrual basis operating expenses
start with cash paid for operating expenses (from cash basis income statement)
+ending accrued liabilities (expenses incurred during period but not yet paid)
-beginning accrued liabilities (expenses incurred during prior period and paid in current period)
-ending prepaid expenses (payments made during current period that will benefit future periods)
+beginning prepaid expenses (payments made in prior periods that benefited current period)
98
converting cash basis net income to accrual basis net income
***common for a simulation
-do conversions for revenue, COGS, and expenses to get net income
99
dupont ROA
(NI/net sales)*(net sales/avg total assets)
100
working capital turnover
sales / average working capital
101
when property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner's capital account?
fair value at the date of contribution
102
GAAP rules relating to the formation of a partnership
use FV of asset contributed
103
tax rules relating to the formation of a partnership
use NBV of assets contributed
104
exact method for creation of a new partnership interest with investment of additional capital
= book value
step 1: determine the exact amount a new partner will have to pay to get their capital account in the exact proportional interest to the new net assets of the partnership
step 2: there is no goodwill or bonus
step 3: old partners capital account "dollars" stay the same
step 4: old partners % ownership changes, but that change is generally not a requirement on the CPA exam
**questions will ask "how much SHOULD the new partner contribute in order to have an x% interest in the new partnership?"
105
bonus method for creation of a new partnership interest with investment of additional capital
= balance in total capital accounts controls the capital account allocation; recognize inter-capital transfer
step 1: determine total capital and interest to the new partner
step 2: If interest (new partner paying more) less than amount contributed, bonus to old partner
step 3: if interest (new partner paying less) greater than amount contributed, bonus to new partner
106
goodwill method for creation of a new partnership interest with investment of additional capital
= going in investment (dollars) controls capital account allocation and goodwill calculation; recognized intangible asset
step 1: compute new "net assets before GW" after admitting new (or paying old) partner
steo 2: memo: compute new "capitalized" new assets (=total net worth) and compare "capitalized net assets" with "net assets before GW"
step 3: the difference is goodwill to be allocated to the old partners according to their old partnership profit ratios
107
withdrawing of a partner: bonus method
-difference between the balance of the withdrawing partner's capital account and the amount that period is paid is the amount of the "bonus"
-"bonus" is allocated among the remaining partners capital accounts in accordance with their remaining profit and loss ratios
-JEs:
step 1: JE to revalue the assets to reflect FV --> debit asset adjustment (adjust to FV), credit capital %
step 2: JE to pay off withdrawing partner --> debit capital %, credit cash (pay more than capital account)
108
withdrawing of a partner: goodwill method
-amount of implied goodwill is allocated to all of the partners in accordance with their profit and loss ratios
-after the allocation, the balance in the withdrawing partners capital account should = the amount that person is to receive in the final settlement of their interest
-JEs:
step 1: JE to revalue the assets to reflect FV --> debit asset adjustment (adjust to FV), credit capital %
step 2: JE to record GW to make withdrawing partners capital account = payment --> debit GW, credit capital % (partner leaving should have the amount of buy out)
step 3: JE to pay off withdrawing partner --> debit withdrawing partner 100% of buy out, credit cash
109
order of preference regarding distribution of assets in a liquidation of a partnership
1. creditors (including partners who are creditors)
2. partners capital (right of offset between a partners loans to and from partnership)
110
liquidation of a partnership assets may result in:
1. a gain on realization
2. a loss on realization
3. a loss on realization resulting in a capital deficiency
111
what is a capital deficiency for a liquidation of a partnership?
-debit balance in a partners capital account and indicates that the partnership has a claim against the partner for the amount of the deficiency
-right of offset: use their loan account
-if a deficiency still exists, remaining partners charged: if negative partner runs out of money
112
when the allowance method of recognizing bad debt expense is used, the allowance would decrease when a:
specific uncollectible account is written off
