Conceptual Framework

Question 1

What are 5 framework concepts that form GAAP?

Answer 1

1. Primary qualitative characteristics - relevance and faithful representation
2. Enhancing qualitative characteristics - comparability, verification, timeliness and understandability
3. Assumptions - entity, going concern, time period and unit of measure
4. Principles - historical cost, revenue recognition, matching and full disclosure
5. Constraints - materiality and cost benefit.

Question 1

7 Key Components of External Financial Statement Report

Answer 1

1. Income Statement;
2. Statement of Comprehensive Income
3. Balance Sheet
4. Statement of Changes in Owners’ Equity
5. Statement of Cash Flows
6. Footnote Disclosures and supplementary schedules
7. Auditor’s Opinion

Question 2

3 Main Aspects of Financial Reporting

Answer 2

1. Recognition - A recognized item is recorded in an account and ultimately affects the financial statements.
2. Measurement - Concerns the dollar amount assigned to an item.
3. Disclosure - Many unrecognized amounts are reported in the footnotes to complete the portrayal of the firm’s financial position and performance.

Question 3

Converting Cash Basis Income to Accrual Basis Income (using beginning and ending account balances)

Answer 3

\+ Cash Basis Income
\+ Beginning Liabilities
-  Ending Liabilities
- Beginning Assets
\+ Ending Assets
= Accrual Basis Income

Question 4

Converting Cash Basis Income to Accrual Basis Income (using changes in account balances)

Answer 4

\+ Cash Basis Income
\+ Increases in Asset Balance
- Decreases in Asset Balance
\+ Decreases in Liability Balance
- Increases in Liability Balances
= Accrual Basis Net Income

Question 5

What is the valuation measurement basis used for each of the following types of accounts on the balance sheet?

• PP&E and Intangibles
• Receivables
• Inventory
• Investments in marketable securities
• Liabilities
• Owner’s equity

Answer 5

• PP&E and Intangibles: Historical costs and depreciated/amortized historical cost
• Receivables: net realized value
• Inventory: lower of cost or market
• Investments in marketable securities: market value
• Liabilities: present value
• Owner’s equity: historical value of cash inflows and residual value

Question 6

3 Categories of Cash Flows

Answer 6

1. Operating - transactions that flow through the income statement
2. Investing - acquisition and disposal of LT assets and investments other than cash equivalents
3. Financing - related to liabilities and owners equity

Question 7

5 Objectives of Financial Reporting

Answer 7

1. Amount, timing, and uncertainty of future cash flows
2. Ability to generate future net cash inflows
3. Economic resources (assets), claims to resources (liabilities), strengths and weaknesses, liquidity and solvency
4. Effectiveness of management’s stewardship responsibilities
5. Effects of transactions and events that change assets and liabilities

Question 8

2 Primary Qualitative Characteristics of Financial Reporting (each has 3 explanations)

Answer 8

1. Relevance
   - Predictive value
   - Confirmatory value
   - Materiality
2. Faithful Representation
   - Completeness
   - Neutrality
   - Free from error

Question 9

4 Enhancing Qualitative Characteristics of Financial Reporting

Answer 9

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

Question 10

4 Accounting Assumptions

Answer 10

1. Entity - separate and distinct from owners
2. Going Concern - indefinite life beyond owners
3. Unit of Measurement - stable monetary unit of measure
4. Time Period - life broken into time frames (year, quarter, month)

Question 11

4 Accounting Principles

Answer 11

1. Historical Cost - recorded at cash value at time of origin
2. Revenue Recognition - when realized and earned
3. Matching - expenses matched with revenues they produce
4. Full Disclosure - record relevant information that cannot be recognized in financial statements

Question 12

3 Valuation Techniques for Fair Value

Answer 12

1. Market approach - uses market transactions of identical assets or liabilities to determine fair value
2. Income approach - discounting future cash flows
3. Cost approach - amount to replace service capacity of asset, adjusting for obsolescence

Question 13

6 Instruments not Eligible for Fair Value Option

Answer 13

1. Investment in subsidiary that is to be consolidated
2. Interest in variable interest entity to be consolidated
3. Employee oriented plans (pensions, retirement, etc.)
4. Assets/Liabilities under lease accounting
5. Demand deposit liabilities of financial institutions
6. Instruments that are part of shareholders equity

Question 14

What is the IASB’s due process for issuing an IFRS?

7 Steps

Answer 14

1. Add item to working agenda
2. Discuss the issue
3. Prepare the discussion paper
4. Publish the discussion paper
5. Issue the exposure draft
6. Analyze comments to the exposure draft
7. Issue the IFRS

Question 15

Under Rule 205, Securities Act of 1933, an issuer is a foreign private issuer unless the following criteria are met:

Answer 15

1. More than 50% of voting securities owned directly or indirectly by U.S. citizens
2. One of the following: a) Business administered principally in the U.S., b) More than 50% of assets in U.S., c) Majority of directors/executives are U.S. citizens or residents

Question 16

Difference between an accrual and a deferral

Answer 16

An accrual is for accumulating the recognition of revenues and/or expenses for the current period as an as an asset or liability.

A deferral is an accumulation of an asset and/or liability to be recognized as revenue and/or expense in a future period.