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FAR - Financial Accounting & Reporting > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

Name the single source of authoritative nongovernmental U.S. GAAP

A

the FASB “Accounting Standards Codification” (ASC)

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2
Q

The term “International Financial Reporting Standards” includes what standards?

A
  • International Accounting Standards (IAS)
  • International Financial Reporting Standards (IFRS)
  • IFRIC Interpretations
  • SIC Interpretations
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3
Q

Who are the primary users of general purpose financial reports?

A

Existing and Potential:

  • Investors
  • Lenders
  • Other creditors
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4
Q

Name the pervasive constraint on the information provided in financial reporting

A

Cost constraint:
The benefits of reporting financial information must be greater than the costs of obtaining and presenting the information

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5
Q

Name the fundamental qualitative characteristics of useful financial information

A

Relevance and Faithful Representation

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6
Q

Name the three elements of Relevance

A
  1. Predictive value
  2. Confirming value
  3. Materiality
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7
Q

Name the 3 elements of Faithful representation

A
  1. Neutrality
  2. Completeness
  3. Freedom from error
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8
Q

Name the enhancing qualitative characteristics of financial information

A

Comparability
Verifiability
Timeliness
Understandability

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9
Q

According to SFAC #5, what should a full set of financial statements include

A
  • Statement of Financial Position (the balance sheet)
  • Statement of Earnings (the income statement)
  • Statement of Comprehensive Income
  • Statement of Cash Flows
  • Statement of Changes in Owners’ Equity
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10
Q

What is the difference between Realization and Recognition?

A

Realization: when sold and converted to cash (or claims to cash)
Recognition: when recorded in the financial statements

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11
Q

List the 10 elements of Financial statements according to SFAC #6

A 
Comprehensive Income
Revenues
Expenses
Gains &
Losses
Assets
Liabilities
Equity (of Net Assets)
Investments by Owners
Distributions to Owners
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12
Q

List the 6 elements of Financial Statements according to the IASB Framework

A 
Assets
Liabilities
Equity
Income (revenue and gains)
Expenses (expenses and losses)
Capital maintenance adjustments
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13
Q

Name the 5 elements of Present Value measurement per SFAC #7

A

Estimate of future cash flow
Expectations about timing Variations of future cash flows
Time value of money (the risk-free rate of interest)
The price for bearing Uncertainty
Other factors (e.g., liquidity issues and market imperfections)

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14
Q

Describe the expected cash flow approach for Present Value computations

A

Considers a range of possible cash flows and assigns a (subjective) probability for each cash flow in the range to determine the weighted-average, or “expected” future cash flow

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15
Q

What is the presentation order of the major components of an income and retained earning statement?

IDEA

A

IS:
Income (or loss) from continuing operations
income (or loss) from Discontinued operations
Extraordinary items

Retained Earnings Statement:
cumulative effect of a change in Accounting principle

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16
Q

The gain (loss) from discontinued operations can consist of…

A

An impairment loss, a gain/loss from actual operations, and a gain/loss on disposal

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17
Q

In what period are the following reported:

  1. An impairment loss?
  2. A gain/loss from actual operations?
  3. A gain/loss on disposal?
A

All are reported in the period in which they occur

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18
Q

In reporting Discontinued Operations, how is a “component” of an entity defined under U.S. GAAP and IFRS?

A

US GAAP:

  1. an operating segment
  2. a reportable segment
  3. a reporting unit
  4. a subsidiary
  5. an asset group

IFRS:

  1. a separate major line of business or geographical area of operations
  2. a subsidiary acquired exclusively with a view to resale
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19
Q

How do we account for subsequent increases in the fair value of a discontinued component?

A

A gain is recognized for the subsequent increase in fair value minus costs to sell (but not in excess of the previously recognized cumulative loss). The gain is reported in the period of increase

20
Q

What types of costs are associated with exit and disposal activities?

A
  • Involuntary employee-termination benefits
  • Costs to terminate a contract that is not a capital loss
  • Other costs associated with exit or disposal activities
21
Q

Define Extraordinary items

A
  • Material in nature
  • of a character significantly different from the typical or customary business activities (unusual)
  • Not expected to recur in the foreseeable future (infrequent)
  • Not normally considered in evaluating the ordinary operating results of an enterprise

keyword: unusual and infrequent. IFRS doesn’t recognized extraordinary item

22
Q

List some examples of Extraordinary items

A
  • the abandonment of, or damage to, a plant due to an infrequent earthquake or an infrequent flood
  • an expropriation of a plant by the government
  • a prohibition of a product line by a newly enacted law or regulation
23
Q

Name the 3 types of Accounting Changes

A
  1. Change in an accounting principles
  2. Change in accounting estimate
  3. Change in accounting entity
24
Q

How is a change in Accounting Principle reported?

A
  • cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented
  • Prior-period financial statements are restated, if presented
25
Q

What are the special changes in an accounting principle?

How are special changes in accounting principle reported?

A
  • A change to LIFO from another method of inventory pricing under US GAAP
  • Any other change in which a cumulative effect adjustment is considered impractical to calculate
    Special changes are reported prospectively (like a change in estimate)
26
Q

How is a change in an Accounting Estimate reported?

A
  • Prospectively
  • The effect is shown in the current and/or future periods that are affected by the change
  • Financial statements are not restated
27
Q

Under US GAAP, how is a change in the Accounting Entity reported?

A

all current and prior period financial statements presented are restated

28
Q

How are Error Corrections reported?

A

Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated

29
Q

Define Comprehensive Income

A

Change in equity (net assets) that results from revenue, expenses, gains, and losses during a period, as well as any other recognized changes in equity that occur for reasons other than investments by owners and distributions to owners

30
Q

Identify 5 items included in Other Comprehensive Income (OCI)

PUFER

A

Pension adjustments
Unrealized gains and losses on available-for-sale securities
Foreign currency translation adjustments and gains/losses on foreign currency transactions that are designated as economic hedges of a net investment in a foreign entity
Effective portions of cash flow hedges
Revaluation surplus (IFRS only)

31
Q

List the 3 formats acceptable for reporting Comprehensive Income. Which format is prohibited under IFRS?

A

Statement of Comprehensive Income (single-statement approach)
Statement of Income followed by separate Statement of Comprehensive Income (two-statement approach)
Component of the Statement of Owners’ Equity (prohibited under both IFRS and US GAAP today)

32
Q

List some disclosure requirements for Comprehensive Income

A
  • Tax effects of each component included in current OCI
  • Changes in the accumualted balances of components of OCI
  • Total accumulated OCI
  • Reclassification adjustments between OCI and Net Income
33
Q

Identify the contents of the Summary of Significant Accounting Policies note to the FS

A

Summary of Significant Accounting Policies
Identify and describe:
- measurement bases used in preparing the FS
- principles and methods
- criteria
- policies
- pricing

34
Q

Describe the related party disclosures required under US GAAP and IFRS

A
  • Material related party transactions
  • Related party notes/accounts receivable
  • Control relationships

Note: IFRS requires disclosure of key management compensation. US GAAP does not require this disclosure

35
Q

What are the US GAAP disclosure requirements for risks and uncertainties?

A
  • Nature of operations
  • Use of estimates in preparing the FS
  • Significant estimates
  • Current vulnerability due to certain concentrations
36
Q

What are the guidelines for interim reporting?

A
  • Use same accounting principles that were used in the most recent annual report
  • Allocate expenses to the interim period benefited
  • Revenues are recognized in the period in which they are earned and realized or realizable
  • A total for comprehensive income in condensed FS of interim periods
37
Q

What income tax rate is used in interim financial reporting?

A

Use best estimates of effective tax rate to be applicable for full fiscal year on quarterly statements

38
Q

Name the four required disclosures for segments of an enterprise

A
  • Operating segments
  • Products and services
  • Geographic areas
  • Major customers
39
Q

Define Operating Segment

A

Distinct revenue-producing components of the enterprise about which separate financial information is produced internally, and whose operating results are regularly reviewed by the enterprise.

Determined using a “management approach”

40
Q

Name 2 quantitative thresholds used in identifying reportable operating segments

A

10% “Size” test

75% “Reporting Sufficiency” test

41
Q

Describe the 10% test for identifying reportable segments

A
  • Revenue: reported revenue, including both sales to external customers and intersegment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segments
  • Reported profit or loss: The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount of:
    • The combined reported profit of all operating segments that did not report a loss, or
    • The combined reported loss of all operating segments that did report a loss
  • Assets: Assets are 10% or more of the combined assets of all operating segments.

Note: must meet only 1 of the above

42
Q

What is the 75% rest for identifying reportable segments?

A

Combined external (consolidated) revenue of all reportable segments must be at least 75% of the total consolidated revenue of the entity.

The practical limit is 10 segments, but this is not a precise limit

43
Q

What are the disclosure requirements for Reportable Operating Segments?

A

For each reportable segment, the entity must report:

  • Identifying factors
  • Products or services
  • Profit or loss details
  • Assets details
  • Liability details (IFRS only)
  • Measurement criteria
  • Reconciliations
44
Q

Define Development-stage enterprise

A

Enterprise that devotes substantially all of its efforts to establishing a new business and either planned principal operations have not commenced or no significant revenue has been generated therefrom

45
Q

Indicate any special accounting treatment for development-stage enterprise

A

Same generally accepted accounting principles as established operating enterprises, with additional disclosures:

  • Identify statements as those of a development-stage enterprise
  • Accumulated losses identified as “deficit accumulated during development stage”
  • In the Income Statement, show revenue and expenses, and cumulative total of both amounts from company’s inception
  • In the statement of cash flows, include cumulative amounts of cash inflows and outflows from enterprise’s inception and current amounts of cash inflows and outflows for each period presented
  • Issued a separate statement of stockholders’ equity, indicating shares issued, date of issuance, dollar amounts assigned, and noncash consideration, if any
46
Q

What is the date of an entity’s transition to IFRS?

A

the date of the opening BS

47
Q

Describe the Form 10-K and the Form 10-Q.

What level of assurance must be provided with the FS submitted in these forms?

A

Form 10-K: Filed annually by U.S. registered companies. Includes a summary of financial data, MD&A, and AUDITED FS prepared using US GAAP

Form 10-Q: Filed quarterly by U.S. registered companies. Includes unaudited (reviewed) FS, interim MD&A, and certain disclosures

FAR - Financial Accounting & Reporting (3 decks)

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