Chapter 1 - Conceptual Framework (3)

Question 1

Consistency

Answer 1

same principle each year

Question 2

Conservatism

Answer 2

considering all risks inherent in the business (accruing a contingent loss)

Question 3

Cost/Benefit

Answer 3

Costs don’t exceed benefits to be derived

Question 4

Matching

Answer 4

Recognize a cost as an expense in the same period as the benefit (usually a revenue) is recognized

Question 5

Allocation

Answer 5

Spreading a cost over more than one period

Question 6

Full Disclosure

Answer 6

Providing all useful info in the financial statements

Question 7

Recognition

Answer 7

Booking an item in the financial statements

Question 8

Realization

Answer 8

Converting non-cash resources into cash or a claim to cash

Question 9

When to realize a F/S element and how to measure it

Answer 9

Meets the definition of an element (assets, liability);

Elements is the capable of being measured in monetary terms;

The item is Relevant and Faithful Representation (useful)

Question 10

Historical Cost

Answer 10

amount you paid for it (PP&E)

Question 11

Replacement cost

Answer 11

what it would cost to replace an item (inventory)

Question 12

Fair market value (FMV)

Answer 12

Per ASC 820, “the price that would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date”

Unrealized gains or loss on trading securities = Statement of Income

Unrealized gains or loss on Available for sale securities & derivatives = OCI

All derivatives are always reported at fair value

When FV option is elected, unrealized gains and losses are reported in income

Question 13

Net realizable value (NRV)

Answer 13

amount expected to a be converted into (A/R)

Question 14

Present value (PV)

Answer 14

discounted cash flows due to the time value of money (notes/receivable, bonds/payable, leases)

Question 15

Impairment Losses

Answer 15

Reduction in the carrying value of an asset to its fair value in the period of the impariment

Question 16

Specific items that do not qualify for the fair value election

Answer 16

Pension plan, post retirement and other post -employment benefits

Leases

Financial instruments that are components of equity

Question 17

Financial Instruments

Answer 17

cash, evidence of an ownership interest in an entity, or a contract that both:

a) Imposes on one entity a contractual obligation that either:
1. To deliver cash or another F/I to a second entity
2. To exchange other F/I on potentially unfavorable terms with second entity

b) Conveys to that second entity a contractual right either:
1. To receive cash or another F/I from the first entity
2. To exchange other F/I on potentially favorable terms with the entity

Question 18

Financial assets and liabilities that would qualify for the fair value election:

Answer 18

Most investments:

• AFS securities
• Held to maturity securities
• Investments accounting for under the equity method

F/I such as forward exchange contracts to purchase or sell a foreign currency

Question 19

3 Valuation Techniques

Answer 19

[MIC]

Market Approach - using information generated by market transactions that involve identical or comparable assets or liabilities

Income Approach - analyzing future amounts in the form of revenues, cost savings, earnings, or some other item

Cost Approach - measuring the cost that would be incurred to replace the benefit derived from an asset

Question 20

3 levels of inputs

Answer 20

Level I - Most reliable, involves the use of observable data from actual market transactions, occurring in an active market, for identical assets or liabilities

Level II - Involves the use of observable data from actual market transactions but either:

• The transactions did not occur in an active market, or
• The transactions relate to similar, but not identical, assets or liabilities

Level III - Involves the use of unobservable data and are largely based on management’s judgement