Chapter 1 Flashcards
Name the single source of authoritative nongovernmental U.S. GAAP?
The FASB “Accounting Standards Codification” (ASC)
What is the private company council?
The Financial Accounting Foundation (FAF) created the Private company Council (PCC) to improve standard setting for privately held companies in the U.S The goal of PCC is to establish alternatives to U.S GAAP, where appropriate, to make private company financial statements more relevant, less complex, and cost-beneficial. Accounting alternatives for private companies are incorporated into the relevant sections of the ASC.
IFRS includes what standards?
IAS (Int’l Accy standards), IFRS (Int’l fin reporting standards), IFRIC Interpretations, SIC Interpretations
Who are the primary users of general purpose financial reports?`
Existing and potential: Investors, lendors, and other creditors
Name the fundamental qualitative characteristics of useful financial information?
Relevance and faithful representation
Name the three elements of relevance?
Predictive value, confirming value, and materiality
Name the three elements of faithful representation?
Neutrality, Completeness, and freedom from error
Name the enhancing qualitative characteristics of financial information
Comparability, verifiability, timeliness, and understandability
Name the pervasive constraint on the information provided in financial reporting?
Cost constraint: The benefits of reporting financial information must be greater than the costs of obtaining and presenting the information
According to SFAC No.5, what should a full set of financial statements include?
Statements of financial position (balance sheet), statement of earnings (income statement), statement of comprehensive income, statement of cash flows, statement of changes in owners equity.
List the 10 elements of financial statements according to SFAC No.6
Comprehensive income, revenues, expenses, gains and, losses, assets, liabilities, equity (net assets), investments by owners, distributions to owners. (CREGLALEID) - Acronym
Name the five elements of present value measurement per SFAC no.7
Estimate of future cash flow, Expectations about timing Variations of future cash flows, Time value of money (risk-free of interest), The price for bearing Uncertainty, Other factors (liquidity issues and market imperfections) . EVTUO- Acronym
Describe the expected cash flow approach for present value computations?
Considers a range of possible cash flows and assigns a (subjective) probability to each cash flow in the range to determine the weighted average, or “expected”,” future cash flow.
Name the expense that each of the following unexpired costs turn into as they expire: Inventory, unexpired (prepaid) cost of insurance, net book value of fixed assets, unexpired cost of patients
- Cost of goods sold
- Insurance expense
- Depreciation expense
- Amortization expense
Are gains and losses on the disposal of assets shown on a “gross” basis (where both the sale proceeds and the net book value of the disposed asset are reported) or on the “net basis” (where the only difference between the sale price and the net book value of the disposed asset is reported)
Gains and losses are reported at their net amounts (i.e proceeds less net book value)
How does a “multiple-step” income statement differ from a “single-step” income statement?
A multiple-step income statement reports operating revenues and expenses separately from non operating revenues and expenses and other gains and losses. On a single-step income statement’s presentation of income from continuing operations, total expenses are subtracted from total revenues without separation between operating and non operating revenues and expenses.
What is meant by a “classified” balance sheet?
A classified balance sheet distinguishes current and non-current assets and liabilities
In general, what are the criteria for revenue recognition under U.S GAAP?
Earned and realized or realizable. The following four criteria must be met before revenue can be recognized.
- Persuasive evidence of an arrangements exists
- Delivery has occurred or services have been rendered
- The price is fixed and determinable
- Collection is reasonably assured
What are the four categories of revenue transactions under IFRS, and what are the common revenue recognition criteria for those categories?
- Sales of good
- Rendering of services
- Revenue from interest, royalties, and dividends
- construction contracts
Common revenue recognition criteria include:
Revenues and costs can be reliably measured.
It is probable that economic benefits will flow to the entity. Each category has additional criteria
When should revenue from the performance of services be recognized under U.S GAAP and IFRS?
U.S GAAP- in the period in which the services have been rendered and are able to billed
IFRS- Using the percentage-of-completion method when the outcome of the transaction can be estimated reliably.
What are the conditions for revenue recognition when the right of return exists?
The sales price is substantially fixed at the time of sale
The buyer assumes all risks of loss because the goods are considered in the buyer’s possession
The buyer has paid some form of consideration
The product sold is substantially complete
The amount of future returns can be reasonably estimated.
Identify two methods of revenue recognition for long-term construction-type contracts under U.S GAAP and IFRS
U.S GAAP - % of completion, completed contract
IFRS- % of completion, cost recovery
For long-term construction-type contracts, when are losses recognized?
Immediately when discovered, regardless of the method used for revenue recognition
State the formula for recognizing gain/loss on long-term construction-type contracts under the % of completion method
Total cost of date / total estimated cost of contract. Then multiple amount by Total estimated gross profit. Then minus gross profit recognized to date
State the formula for calculating the gross profit realized on installment sales
Cash received * Total gross profit / sales price
When are the profits recognized under the cost recovery method
Profits are recognized only after all costs have been recovered
Name the types of entities that may be considered for reporting according to the rules for discontinued operations.
component of an entity, group components of an entity, business, nonprofit activity
In reporting discontinued operations, how is a “component” of an entity defined under U.S GAAP and IFRS
- An operating segment
- A reportable segment
- A reporting unit
- A subsidiary
- An asset group
Define the following terms as they are used in the reported discontinued operations: Business and nonprofit activity
A business is 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, and participants.
A nonprofit activity is an integrated set of activities and assets that is conducted and managed for the purpose of providing benefits, other than goods or services at a profit, to fulfill an entity’s purpose or mission.
What conditions must be presented for a disposal to be reported in discontinued operations?
A disposal of a component, group of components, business activity, or nonprofit activity is reported in discontinued operations if the disposal representations a strategic shift that has or will have a major effect on an entity’s operation and financial results.
The gain (loss) from discontinued operations can consist of…
An impairment loss, a gain (loss) from actual operations, and a gain (loss) on disposal
How do we account for subsequent increases in the fair value of a discontinued component
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.
How is a change in accounting estimate reported?
Prospectively
How is a change of accounting principle reported
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.
What are the special exceptions to the general rule for the reporting of changes in an accounting principle?
How are the exceptions reported?
Changes where it is impracticable to estimate the cumulative effect adjustment, e.g a change to LIFO from another method of inventory pricing under U.S GAAP or a change in depreciation methods.
Such exceptions are accounted for prospectively, like a change in accounting estimates.
Name the three types of accounting changes?
Change in accy principle, change in accy estimate, change in accy entity
Under U.S GAAP how is a change in the accounting entity reported?
All current and prior period financial statements presented are restated
How are error corrections reported?
Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated
define comprehensive income
change in equity (net assets) that results from transactions and other events and circumstances from nonowner sources
Identify five items included in other comprehensive income (PUFER)
- P-Pension adjustments
- U- Unrealized gains and losses on available-for-sale securities
- F- 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
- E-Effective portions of cash flow hedges
- R-Revaluation surpluses (IFRS only)
List the two formats acceptable for reporting comprehensive income. How does this compare with IFRS?
Statement of comprehensive income (single-statement approach), statement of income followed by seperate statement of comprehensive income (two-statement approach)
U.S GAAP and IFRS both allow the same two presentations
List some disclosure requirements for comprehensive income
Tax effects of each component included in current “other comprehensive income”
Changes in the accumulated balances of components of “OCI”
Total accumulated OCI
reclass adjustments between OCI and net income
What 4 situations require adjusting journal entries in order to properly presenting financial statements on the accrual basis?
- Cash is received before the revenue is earned (deferred revenue)
- cash is paid before the expense is incurred (prepaid expense)
- cash is received after the revenue has been earned (receivables)
- Cash is paid after the expense has been incurred (accrued expenses)
What is the journal entry to record the earning of deferred revenue?
Debit deferred revenue $xxx
Credit revenue $xxx
What are the three rules for recording adjusting journal entries?
- Adjusting journal entries must be recorded by the end of the entity fiscal year, before the preparation of financial statements
- Adjusting journal entries never involve the cash account
- All adjusting entries will hit one income statement account and one balance sheet account
