Conceptual Framework And Financial Reporting Flashcards
1
Q
What is the American Institute of Certified Public Accountants (AICPA)?
A
The professional organization for participating CPAs.
2
Q
What does the Securities and Exchange Commission (SEC) do?
A
It administers the U.S. securities laws, most notably the Securities Act of 1993 and the Securities Exchange Act of 1934 as well as others.
3
Q
What is the main purpose of the SEC?
A
The main purpose of the SEC is to promote efficient allocation of capital by maintaining open, orderly, and fair securities markets.
4
Q
What comprises United States generally accepted accounting principles (GAAP)?
A
The Financial Acctg. Standards Board (FASB) Acctg. Standards Codification comprise authoritative U.S. GAAP for publicly traded companies. SEC pronouncements are also GAAP for publicly traded entities.
5
Q
What is the role of the Financial Acctg. Foundation (FAF)?
A
The FAF exercise oversight of the FASB, appoints the members of the FASB and ensures funding.
6
Q
What is the Financial Acctg. Standards Board (FASB)?
A
Establishes financial acctg. Standards for business entities.
7
Q
What is the role of the Financial Acctg. Advisory Council (FASAC)?
A
Provides guidance on major policy issues, project priorities, and the formation of task forces.
8
Q
What are the 1st, 3 steps in the FASB uses when issuing a new acctg. Standard?
A
- Considers whether to add a project to its agenda in consultation with the FAF.
- Conducts research.
- Holds a public hearing on the topic.
9
Q
What are the final 3 steps in the standard-setting process?
A
- Evaluate research and comments from interested parties and issue an exposure draft.
- Solicit additional comments.
- Finalize new acctg. guidance and issue Acctg. Standards Updates (ASUs).
10
Q
How do user groups influence the outcome of the FASB standards?
A
Users influence standards by providing input during the due process procedures.
11
Q
What does GAAP address?
A
Recognition, measurement, and disclosure
12
Q
When are expense recognized under accrual acctg?
A
When incurred, regardless of the period of cash payment.
13
Q
What are the 7 key components of the general-purpose external financial report?
A
- Income Statement
- Balance Sheet
- Statement of cash flows
- Statement of retained earnings
- Statement of comprehensive income
- Footnote disclosures
- Auditor’s opinion
14
Q
What purpose does the FASB Accounting Standards Codification serve?
A
Is the compilation of authoritative US GAAP for nongovernmental entities.
15
Q
What topic does the FASB Accounting Standards Codification not include?
A
- Other comprehensive basis fo accounting
- Cash basis
- Income tax basis
- Regulatory accounting principles
16
Q
How are changes to the FASB Acctg Standards Codification accomplished?
A
Through Acctg. Standards Updates (ASU).
17
Q
What is the highest structure of the FASB Acctg. Standards Codification?
A
Areas.
18
Q
What is the reason for the FASB Acctg Standards Codification?
A
To put all acctg guidance in one place.
19
Q
What are the major areas in the FASB Acctg. Standards Codification?
A
- General Principles (100)
- Presentation (200)
- Assets (300)
- Liabilities (400)
- Equity (500)
- Revenue (600)
- Expenses (700)
- Broad Transactions (800)
- Industry (900)
20
Q
What are the primary qualitative characteristics of financial information?
A
Faithful representation and relevance (FARR)
21
Q
What are the ingredient of relevance?
A
- Predictive Value
- Confirmatory Value
- Materiality
22
Q
List the enhancing qualitative characteristics of financial information.
A
- Comparability
- Verifiability
- Timeliness
- Understandability
23
Q
What does it mean to be free from error?
A
Info is free from error if it is truthful
24
Q
What is neutrality?
A
To be neutral, acctg info must be free of bias.
25
What are the ingredients of faithful representation?
- Completeness
- Free from material error
- Neutrality
26
Who is the target audience of financial statements?
Decision makers; mainly potential investors, creditors, and regulators.
27
What is confirmatory value?
To be relevant, acctg info should assist decision makers in confirming past predictions.
28
What is understandability?
Info is understandable if the user comprehends it with reasonable effort and diligence.
29
What are objectives of financial reporting?
To provide info about the entity to current and future users of the financial statements who are making credit and investment decision.
30
What is predictive value?
To be relevant, acctg info should assist financial statement users in making prediction about future events.
31
What is comparability?
The quality of information that enables users to identify similarities and differences between sets of information.
32
What is timeliness?
To be relevant, acctg info must be received in time to make a difference to the decision maker.
33
What is verifiability?
Info is verifiable if different knowledgeable and independent observers can reach similar conclusions.
34
What is completeness?
Info is complete if it includes all data necessary to be faithfully representative.
35
What are revenues?
Revenues are increases in assets or extinguishment of liabilities stemming rom delivery of goods or from providing services - the main activities of the firm.
36
When should a company recognize revenues?
Revenues are recognized when they are earned and collectibility is reasonably assured.
37
What is the full disclosure principle?
Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.
38
What is the entity assumption?
We assume there is a separate acctg entity for each business organization.
39
What is the time period assumption?
The indefinite life of a business is broken into smaller time frames, typically a year, for evaluation purposes and reporting purposes.
40
What is the going-concern assumption?
In the abscesses of information to the contrary, a business is assumed to have an indefinite life.
41
List the elements included in a full set of financial statements.
- Balance Sheet
- Income Statement
- Statement of Comprehensive Income
- Statement of Cash Flows
- Statement of Owner’s Equity
42
What is the constraint in setting accounting standards?
Cost effectiveness (or cost-benefit)
43
What does a fresh start measurement do?
Establishes a new carrying value after an initial recognition and is unrelated to previous amounts (e.g., mark to market accounting and recognition of asset impairments)
44
Define “fair value” (for acctg purposes).
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
45
For purposes of the fair value definition, what are the assumed characteristics of market participants?
Buyers and sellers that are:
- independent of the reporting entity
- acting in their economic best interest
- knowledgeable of the asset or liability and the transaction involved
- able and willing, but not compelled, to transact for the asset or liability
46
What is the major purpose of the fair value framework?
To provide a framework for the use of FV in GAAP so as to:
- Achieve increased consistency and comparability in FV measurements; and
- Expand disclosure when FV measurements are used
47
List the items that entities may elect to measure and report at fair value.
- Recognized financial assets or financial liabilities (some exceptions)
- Firm Commitments
- Written loan commitments
- Rights and obligations under insurance contracts and warranties
- Other financial instruments embedded in non financial derivative instruments
48
List the financial assets and financial liabilities that entities may NOT us fair value to measure and report.
- An investment in a subsidiary or variable interest to be consolidated
- Employers’ and plan’ obligations for pension benefits, other post retirement benefits, post employment benefits
- Financial assets and liabilities under lease acctg
- Demand deposit liabilities of financial institutions
- Financial instruments classified by the issuer as a component of shareholders’ equity
49
Define “entry price.”
The price paid to acquire an asset or the price received to assume a liability.
50
Define “exit price.”
The price that would be receive to sell an asset or paid to transfer a liability.
51
List the situations where the entry price may not be the exit price.
- The transaction is between related parties
- The transaction occurs when the seller is under duress
- The unit of account included in the transaction price is different from the unit of account that would be used to measure at fair value
- The market in which the transaction price occurred is different from the market in which the asset would be sold or the liability transferred
52
What are the 3 valuation techniques ( or approaches) that should be used in determining fair value for the purposes of GAAP?
1. Market approach
2. Income approach
3. Cost approach
53
Describe the market approach for determining fair value for the purpose of GAAP.
This approach uses prices and other relevant information generated by market transactions involving assets or liabilities identical or comparable to those being valued.
54
Describe the income approach for determining fair value for the purpose of GAAP.
This approach converts future amounts to a single present amount.
55
Describe the cost approach for determining fair value for the purposes of GAAP.
This approach uses the amount currently required to replace the service capacity of an asset.
56
List the dates when an entity may elect to use fair value option for an eligible item.
- When the item is first recognized
- When the firm commitment occurs
- When financial, an asset previously reported at fair value with unrealized gain/loss in earnings no longer qualifies for that fair value treatment
- When accounting treatment for an investment changes because it becomes subject to the equity method or ceases to be eligible for consolidation
- When an item is measured at fair value at the time of an event but does not require fair measurement at subsequent reporting dates
57
Describe fair value measurement inputs.
Inputs can be observable or unobservable. Observable inputs are based on mkt. data from independent sources. Unobservable inputs are the entity’s assumptions about the factors that impact determination of fair value.
58
What purpose does the fair value hierarchy serve?
To prioritize the inputs to valuation techniques used to measure fair value.
59
What are the 3 levels of the fair value hierarchy and what does each consist of?
Level 1: highest level, are unadjusted quoted prices in active markets for assets and liabilities identical to those being valued
Level 2: are observable for assets or liabilities, either directly or indirectly, other than quoted prices described in Level 1
Level 3: lowest level, are unobservable and used to determine fair value only if observable inputs are not available
60
What types of comparisons are fair value option disclosures intended to facilitate?
- Between entities that choose different measurement methods for similar assets and liabilities
- Between assets and liabilities in the financial statements of an entity that selects different measurement for similar assets and liabilities
61
What significant fair value disclosures are required only in annual statements?
The methods and significant assumptions used to estimate fair value.
62
Distinguish between assets and liabilities measured at fair value on a recurring basis and non recurring basis.
Assets and liabilities measured at fair value on recurring basis are adjusted to fair value period after a period. Assets and liabilities measured at fair value on a non recurring basis are adjusted to fair value only at the time of a particular even (e.g., significant modification of debt).
63
What are the special disclosures required for fair value measurements (on a recurring basis) that are based on unobservable inputs (i.e., Level 3 inputs)?
- Narrative description of the uncertainty of fair value to changes in unobservable inputs
- Unrealized gains/losses for the period and where reported
64
What is simplified for small and medium-sized entities (SMEs) in International Financial Reporting Standards (IFRS)?
- Topics that are irrelevant are eliminated
- Recognition and measurement aspects are simplified
- Disclosures reduced to 10% of those in regular IFRS
65
What did the SEC eliminate for foreign companies listed in the United States?
A reconciliation of earnings and equity to US GAAP (Form 20-F) in their financial statements.
66
List the steps of developing International Acctg Standards.
- Add the item to the agenda
- Discuss the issue
- Publish a discussion paper if the topic is difficult
- Prepare and vote on the exposure draft
- Issue the exposure draft
- Analyze comments on the exposure draft
- Debate the issue at hand
67
List some examples of simplified recognition and measurement for SMEs in IFRS.
- Goodwill is amortized
- All research and development is expensed
- Categories of investments are reduced
- Less prior-yr data is required for first time adoption
68
Are IFRS more rules based or principle based?
Principle based
69
What are some omitted topics for SMEs in IFRS?
- Earnings per share
- Interim financial reporting
- Segment reporting
70
When can revisions happen for SMEs in IFRS?
Revisions for SMEs standards happen every 3 years at most
71
Under IFRS, if no standards exist on an acctg issue, what should companies use?
The definitions, recognition criteria, an measurement concepts for assets, liabilities, income, and expenses in the Framework.
72
What is the highest level of international GAAP?
The International Financial Reporting Standards
73
Does the IASB framework include losses for the term “expense”?
Yes
74
What elements of the FASB framework are not included int he IASB framework?
- Investment by owners
- Distributions to owners
- Comprehensive income
- Gains
- Losses
75
What elements are considered income under the FASB framework?
“Revenue” and “gains” as separate elements.
76
What will be the underlying conceptual support for future principles-based acctg standards?
Developing a common framework.
77
When do you recognize an element in the IASB framework?
When it is probable that there is a future economic benefit and the item has a cost or value that can be measure with reliability
78
What are the underlying assumptions of the IASB framework?
- The financial statements are prepared on the accrual basis
| - The entity is a going concern
79
What is meant by a “reliable measurement”?
It is a measurement in which a reasonable estimate is made.
80
True or False: Income may be realized or unrealized.
True
81
True or False: The IASB framework should apply only to public companies, not private corporations.
False. The IASB framework should apply to both public and private companies.
82
What are some of the purposes of the IASB framework?
- Assist the board to develop new IAS
- Promote harmonization of standards
- Assist and provide info to interested parties
83
What are the 5 elements in the IASB framework?
1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses
84
What comprises income under the IASB framework?
It includes both revenues and gains.
85
What are the various types of GAAP which may be used by a U.S entity?
Depending on the entity, the following types of GAAP may be used
1. US GAAP
2. US Other Comprehensive Basis of Acctg (OCBOA)
3. IFRS
4. IFRS for Small and Medium - sized Entities (SMEs)
86
Identify the types of entities that are not eligible to use IFRS for SMEs.
1. Entities that are required to file financial statements with a regulatory body (e.g., SEC) for the purpose of issuing securities in a public market; or
2. Entities that hold assets in a fiduciary capacity for a broad group of outsiders (e.g., banks, insurance companies, pension funds, etc.)
87
Identify some of the possible advantages of using IFRS for SMEs, instead of U.S. GAAP, by eligible entities.
- More relevant standards
- Less complicated and voluminous standards
- Less costly standards to implement
- Less frequent changes in standards
88
What should financial statements do according to IFRS?
Fairly present the underlying financial position and financial performance of the entity by faithfully representing the underlying economic reality the firm faced during the period.
89
What is the overall objective of financial statements under IFRS?
To provide info about he financial position, financial performance, and cash flows of an entity that is useful to a wide rant of users in making economic decisions.
90
What type of balance sheet is required under IFRS?
Statement of financial position items must be classified as current and non current.
91
Do IFRS allow the term “reserve” on the balance sheet?
Yes
92
What 2 formats are accepted under IFRS for income statement presentation?
1. Single-step statements
| 2. Multiple-step income statements
93
Is a separate statement of other comprehensive income one of the formats permitted under IFRS?
Yes
94
Do IFRS have a required minimum list of items to be reported on the income statement?
Yes.
95
How are expenses classified under IFRS?
Classified by business function or nature of expense.
96
Do IFRS allow revaluation of plant assets and intangible to fair value as a other comprehensive income item?
Yes
97
What approach is used when financial statements are prepared?
The all inclusive approach.
98
Where and how are prior period adjustments shown?
They are shown on the statement of retained earnings as adjustments to the beginning balance of retained earnings in the year that the error is discovered.
99
What are the items in other comprehensive income?
Unrealized gains and losses on investments in securities available for sale, certain pension cost adjustments, foreign currency translation adjustments, and unrealized gains and losses on certain hedging activities.
100
Name the 2 different formats of presentation for the balance sheet.
1. Account form
| 2. Report form
101
How are assets presented on the balance sheet?
Assets are presented in order of decreasing liquidity. The most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as PPE)
102
How are liabilities presented on the balance sheet?
Liabilities are shown in order of maturity. Current liabilities are presented first, and then long term liabilities are presented.
103
How is owner’s equity presented on the balance sheet?
In order of permanence.
104
What are current liabilities?
Liabilities that are due in the upcoming year or the operating cycle of the business, whichever is longer, and which will be met through the transfer of a current asset or the creation of another current liability.
105
How are long term assets and liabilities defined?
By exclusion from current assets and current liabilities.
106
What is the purpose of the statement of cash flows?
To explain the change in cash and cash equivalents that has occurred during the past acctg yr.
107
What are cash equivalents?
Short-term investments that are convertible into a known and fixed amount of cash and have an original maturity to the the purchaser of 3 months or less.
108
What are the categories that are listed on the statement of cash flows?
1. Operating
2. Investing
3. Financing
109
Define “expenses”.
Decreases in net assets or incurrent of liabilities through the provision of goods or services.
110
Define “gains.”
Increases in equity or net assets from peripheral or incidental transactions.
111
What is operating margin?
The excess of operating revenues over operating expenses.
112
What does the single step income statement present?
Total revenues and gains less total expenses and losses.
113
What does the multiple step income statement present?
Includes multiple sub totals of revenues, expenses, gains, and losses Sales - COGS = Gross profit
Gross Profit - Operating expenses = Income from Operations
Income from Operations +/- Other income
Divided
Expenses
= income before taxes
Income before taxes - taxes = NI
114
Define “losses.”
Decreases in equity or net assets from peripheral of incidental transactions
115
What represent increases in net assets or settlements of liabilities by providing goods and services?
Revenues
116
What item are not shown on the income statement?
- Prior period adjustments
- Foreign currency translation adjustments
- Unrealized gains and losses on AFS securities
- Unrecognized pension items
- Cumulative effect of changes in acctg principle
- Unrealized gains and losses on cash flow hedges
117
What is the order of income statement presentation?
- Income from continuing operations
- Income from discontinued operations (net of tax)
- Net income
118
What is the classification of assets that are in the form of cash, or will be converted into cash, or will be consumed within 1 year or the operating cycle of the business, whichever is longer?
Current Assets
119
How are current assets listed on the balance sheet?
Declining order of liquidity.
120
What is another name for the balance sheet?
The statement of financial position
121
Define “net realizable value.”
The amount the firm expects to receive from the sale or collection of an item.
122
What is the operating cycle?
The period of time from the purchase of inventory, to payment of the payable on inventory purchase, to the sale of goods, to the collection of receivable, and then to purchasing inventory all over again
123
What is a valuation account used for?
Used to increase or decrease the book value of an item to a measure of current value
124
Define “current liability.”
A liability expected to be extinguished through the use of current assets or by the incurrence of current liabilities.
125
Describe the formula for quick or acid test ratio
(Cash + Short Term Investments + Accts Receivable)
Divided
Current Liabilities
126
What are the forms of the statement of comprehensive income?
- Single statement
| - 2 statements
127
What is the main purpose of disclosing comprehensive income?
To report the net change in equity in a single amount.
128
What is comprehensive income?
Net income +/- unrealized gains and losses on securities available for sale, unrealized pension cost, certain unrealized gains and losses on derivatives, and foreign currency translation adjustments
129
What are the 2 ways of reporting comprehensive income?
1. As a separate statement of comprehensive income
| 2. As part of the income statement
130
What is NI +/- other components of comprehensive income?
Comprehensive Income
131
What are OCI items?
- Unrealized gains and losses on debt securities available for sale
- Unrecognized pension gains and losses
- Foreign currency translation adjustments
- Certain derivative gains and losses
132
What type of account is AOCI?
Owner’s equity
133
What is another OCI reclassification adjustment?
When an OCI item from a previous year is removed from AOCI.
134
What are the types of statements of OCI?
- Single statement of NI and comprehensive income
| - 2 separate statements: a statement of NI and statement of comprehensive income
135
Does AOCI have is own column in the vertical format?
Yes
136
How are accts listed in the vertical format?
Listed in separate columns
137
In what type of format does the statement of changes in equity appear?
The format is vertical and horizontal.
138
How many years of OE must be reported by SEC registrants?
3 years of OE statements.
139
List the other names for statement of changes in equity.
- Statements of changes in owners’ equity
- Owner’s equity statement
- Statement of shareholder’s equity
- Statement of owners’ equity
140
What do vertical format statements allow accountants to do?
Check accuracy by comparing total OE computed as (1) the sum of each transaction affecting OE and (2) the sum of individual OE account balances
141
Is the statement of changes in equity required under IFRS?
Yes
142
What is the basic purpose of the statement of cash flows?
Is to provide info about the cash receipts and cash payments for an entity to help investors, creditors, and others.
143
When is a statement of cash flows required?
For all business enterprises that report both financial position (balance sheet) and results of operations (income statement) for a period.
144
What is reported on the statement of cash flows?
- Info about the cash receipts and cash payments for an entity
- The difference between net income and net operating cash flows
- Information about investing and financing activities that do not involve cash inflows or outflows
145
What is the reporting basis of the statement of cash flows?
The reporting basis is cash and cash equivalents
146
List the required categories for the statement of cash flows.
- Net cash inflow or outflow from operating activities
- Net cash inflow or outflow from investing activities
- Net cash inflow or outflow from financing activities
- Effects of foreign currency translation
- Reconciliation of net cash inflows/outflows with the reported change in cash and cash equivalents on the balance sheet
- Noncash investing and financing activities
147
Name the 4 major sections in the direct method cash flow statement.
1. Operating cash flows
2. Investing cash flows
3. Financing cash flows
4. Reconciliation of net income and net operating cash flows
148
What is the cash flow category for collections of principal amounts on loans made to other entities?
Investing
149
Name the 2 formats permitted for the statement of cash flows.
1. Indirect
| 2. Direct
150
What is the indirect method on the statement of cash flows?
It reconciles net income to cash flows from operating activities.
151
What is the direct method on the statement of cash flows?
This method presents actual inflows and outflows from cash operations. It must also disclose the indirect method (reconciliation of net income to cash flows from operations) as a supporting schedule.
152
What is the cash flow category for interest paid and received?
Operating activities
153
Where is the cash effect on foreign currency translation reported?
It is reported as a separate part of the reconciliation of the change in cash and cash equivalents during the period.
154
Where are noncash investing and financing activities reported?
They are reported on the face of the statement of cash flows or as a separate disclosure.
155
What are some examples of cash inflows classified as investing activities?
- Sale of long term assets
- Collection of loan principal
- Disposal of debt securities classified as held to maturity and available for sale and equity securities that will not be sold in the near term
- Sale of productive assets (not inventory)
156
What are some examples of cash outflows classified as financing activities?
- Sale of own stock
| - Proceeds from borrowing
157
What are some example of cash outflows classified as financing activities?
- Repurchase of own stock
- Paying back lenders (principal only)
- Payment of dividends
158
What is the cash flow category for purchases of securities that will be sole in the near term?
Operating
159
What is the cash flow category for purchases of debt securities classified as available for sale?
Investing
160
What is the cash flow category for dividends paid?
Financing
161
What is the cash flow category for loans made to other entities?
Investing
162
What is the cash flow category for principal payments on short term and long term loans from suppliers made to acquire inventory for resale?
Operating
163
What is the cash flow category for principal payments on short term and long term loans from financial institutions made to acquire inventory for resale?
Financing
164
What is the cash flow category for principal payments on short term and long term loans (from financial institutions or dealers) made to acquire plant assets?
Financing
165
What is the purpose of the operating section of the statement of cash flows under the indirect method?
Purpose is to adjust accrual net income to net cash flow from operating activities.
166
What is the purpose of the operating section of the statement of cash flows under the direct method?
Purpose is the show all cash inflows and outflows for operating activities.
167
Using the indirect method for reporting cash flows from operations, should an increase in AR be + or - from accrual based NI?
An increase in AR should be subtracted.
168
Using the indirect method for reporting cash flows from operations, should a decrease in inventory be + to or _ from accrual based NI?
A decrease in inventory should be added.
169
Using the indirect method for reporting cash flows from operations, should an increase in AP be + to or - from accrual based NI?
An increase in AP should be added.
170
Using the indirect method for reporting cash flows from operations, should a decrease in unearned revenue be + to or - from accrual based NI?
A decreased in unearned revenue should be subtracted.
171
Define “general prices.”
Refers to a market basket of items that the typical consumer purchases.
172
Define “specific price change.”
The change in the price of a specific good or service over a period of time.
173
Define “purchasing power loss.”
Losses that result from holding monetary assets during inflationary times or having monetary liability during deflationary times.
174
Define “purchasing power.”
The purchasing power of an asset is the amount of goods and services that can be obtained by transferring the asset to another party.
175
Define “nonmonetary items.”
The specific price of nonmonetary items can change.
176
Define “constant dollars.”
Measurements in the general price level as of a specific date.
177
What is the management discussion & analysis (MD&A) section?
It is a narrative written by management that is an integral part of the disclosure of the financial statements.
178
What are the disclosure requirements for non current liabilities?
- Combined aggregate amount of maturities on borrowing 5+ years after balance sheet, sinking fund requirements
- The aggregate amount of payments for unconditional obligations to purchase fixed or minimum amounts of goods or services
- The fair value of each financial debt instrument in the financial statement or in the notes
- The nature of the firm’s liabilities, interest rates and maturity dates, conversion options, assets pledged as collateral, and restrictions
179
Under IFRS, what should the summary of significant accounting policies include?
- Judgements and key assumptions made in applying those policies
- Measurement bases used for recognition (eg, historical cost, fair value)
- Information enabling an assessment of the estimation uncertainty that could result in a material adjustment to the balances of assets and liabilities, which are pint estimates in many cases
180
Define “inflation.”
It is the increase in general prices for a period of time; deflation is the decrease in general prices.
181
What is included in illegal acts for companies?
Illegal contributions and bribes
182
What is the difference between error and irregularities?
Errors are unintentional. Irregularities are intentional.
183
Define “nominal dollars.”
Measurements in the price level in effect at a transaction date. These measurements are not adjusted for inflation.
184
What is presented in the related party transaction disclosures?
- Nature of relationship
- Description of all transactions for years presented
- Dollar amounts of transactions
- Receivables to or from parties
185
What does the first footnote typically cover?
Summary of significant accounting policies.
186
Define “monetary items.”
The specific price of monetary items cannot change.
187
What disclosure is required by firms in hyper inflationary economies under IFRS?
Disclosure of the impact of inflation on the financial statements is required.
188
Define “purchasing power gain.”
Gains that result from holding monetary assets during deflationary times or having monetary liabilities during inflationary times.
189
Define “severe impact.”
Significant financial disruption due to vulnerability to significant concentration.
190
When are disclosures required about certain significant estimates?
When it is reasonably possible an estimate will change within 1 year of the date the financial statements are issue, and effect of the change will be material.
191
List the aspects of risk due to a firm’s operations.
- Products and services
- Geographical locations
- Principal Markets
192
Which item should be included in disclosures about risk due to certain significant estimates?
- Estimate affected
- Nature of uncertainty
- Effect of change in estimate on financial statements
193
List the areas of risks and uncertainties that need to be disclosed.
- Volume of business with a specific customer
- Revenue from a specific product or service
- Source of supply
- Geographical market
- Any information related to the entity’s ability to continue as a going concern
194
List the aspects of risk due to use of estimates.
- Estimates are unavoidable in preparing financial statements
- Estimates are not exact
- Estimates involve assumption about the future
195
A subsequent event existing at the balance sheet date requires what kind of disclosure?
Recognition in the financial statements.
196
When can refinancing current debt be classified as noncurrent?
When the following are issued:
- Issue stock to extinguish the debt
- Refinance the current liability with a noncurrent liability
- Enter into an irrevocable agreement to refinance the current liability with a noncurrent liability
197
A subsequent event that did not exist at the balance sheet date requires what kind of disclosure?
Footnote disclosure
198
What are two categories of subsequent events?
1. Existed at the balance sheet date
| 2. Did no exist at the balance sheet date
199
What amount of disposal gain from a discontinued operation is disclosed in the income statement?
The actual amount for the period.
200
Where is the gain/loss on disposal shown?
In a separate line item in the DOP section of the income statement or netted against the discontinued component’s operating income with a footnote disclosure showing both.
201
List the 2 values to report for discontinued operations.
1. Income from discontinued operations
| 2. Gain or loss on disposal
202
What is the amount of operating income from a discontinued operation that must be disclosed in the income statement?
The actual amount for the period.
203
Define “loss on disposal.”
Actual losses and estimated losses when book value > fair value less cost to sell.
204
Under IFRS, how are discontinued operations identified?
A component with operations at that are a separate major line of business or geographical area, part of a coordinated plan to sell or and subsidiaries acquired with the intent to resell.
205
What are the general types of ratios?
- Liquidity/Solvency
- Operational activity
- Profitability
- Equity/Investment leverage
206
Working Capital Formula
CA - CL
207
Acid Test or Quick Ratio Formual
(Cash + NR + Mkt. Securities)
Divided
CL
208
Times Interest Earned Formula
(NI + Interest Expense + Income Tax Expense)
Divided
Interest Expense
209
Time Preferred Dividend Formula
NI
Divided
Annual Preferred Dividend Obligation
210
What do liquidity (or solvency) ratios measure?
They measure the ability of the firm to pay its debts as they come due.
211
What is financial statement ratio analysis?
The development of quantitative relationships between various elements of a firm’s financial statements.
212
Number of Days Sales in AR Formula
365
Divided
AR Turnover
213
Inventory Turnover Formula
COGS
Divided
Average Inventory
214
Number of Days Supply in Inventory Formula
365
Divided
Inventory Turnover
215
What do operational activity ratios measure?
They measure the efficiency with which a firm carries out its operating activities.
216
Determine Operating Cycle Length Formula
Days Sales in AR + Days Supply in Inventory
217
Working Capital Ratio Formula
CA
Divided
CL
218
AR Turnover Ratio Formula
Net Credit Sales
Divided
Average Net AR
219
Cash Availability or Interval Ratio Formula
(Cash + NR + Mkt. Securities)
Divided
Average Daily Cash Expenditures
220
What do equity/investment leverage ratios measure?
Measure relative sources of equity and equity value.
221
Debt to Equity Ratio Formula
Total Liabilities
Divided
Total Shareholders’ Equity
222
Owner’s Equity Ratio Formula
Shareholders’ Equity
Divided
Total Assets
223
Debt Ratio Formula
Total Liabilities
Divided
Total Assets
224
Book Value per Common Stock Ratio Formula
Common Shareholders’ Equity
Divided
of Outstanding Common Shares
225
Book Value per Preferred Share Ratio Formula
Preferred Shareholders’ Equity (including dividends in arrears)
Divided
of Outstanding Preferred Stock
226
Price to Earnings Ratio Formula
Market Price for a Common Share
Divided
Earnings Per Share (EPS)
227
Total Common Stock Dividend Payout Rate Formula
Cash Dividends to Common Shareholders
Divided
Net Income to Common Shareholders
228
Per Share Common Stock Dividend Pay Out Rate Formula
Cash Dividends per Common Share
Divided
Earnings Per Share (EPS)
229
Common Stock Yield Formula
Dividend per Common Share
Divided
Market Price per Common Share
230
Profit Margin Formula
Net Income
Divided
Net Sales
231
Return on Total Assets Formula
(Net Income + Interest Expense (net of tax))
Divided
Average Total Assets
232
Return on Common Stockholders’ Equity Formula
(Net Income - Current Period Preferred Dividend Obligation)
Divided
Average Common Stockholders’ Equity
233
What do profitability ratios measure?
Aspects of a firm’s operating (income/loss) results on a relative basis.
234
Where is the consolidating process carried out?
On a consolidating worksheet, not on the books of any entity.
235
Define “consolidated financial statements.”
Consolidated financial statements present the financial information of 2 or more separate legal entities, usually a parent company and 1 or more of its subsidiaries, as though they were a single economic entity.
236
List the methods a parent may use to carry investment in subsidiary to be consolidated.
- Cost
- Equity
- Any other method it chooses
237
What are the kinds of information needed to prepare consolidated financial statements?
- Financial statements/adjusted trial balances of affiliated entities
- Date as of date of acquisition, including:
1. Book values of subsidiary’s assets and liabilities
2. Fair value of subsidiary’s assets and liabilities
3. Fair value of non controlling interest, if any
4. Fair value of recombination equity interest, if any
- Intercompany transaction data and balances
238
What is the requirement and justification for the use of consolidated financial statements?
Consolidated financial statements are required when one entity has effective control of another entity. Because the entities are under common control, GAAP require that consolidated financial statements be the primary form of financial reporting for the affiliated entities. In form the entities may be separate legal entities, b/c of the common control, in substance they are a single economic entity. The financial statements s/b presented as a single economic entity.
239
Identify the general kinds of eliminating entries made in the consolidating process.
- Investment eliminating entry (always)
- Intercompany receivable/payables elimination(s)
- Intercompany revenues/expenses elimination(s)
- Intercompany profit elimination(s)
240
Under US GAAP, what process must be followed to determine if an entity should be consolidated?
First, it must be determined if the entity is a variable-interest entity (VIE).
- If it is, the reporting entity must determine if it is the primary beneficiary of the VIE and, if so, consolidate the VIE
- If the entity is not a VIE, the reporting entity must determine if it has controlling voting interest in the entity. If so, and nothing prevents the exercise of that control, the reporting entity (parent) must consolidate the entity (subsidiary).
241
What is the basic sequence of steps in the consolidating process?
1. Record trial balances on consolidating worksheet.
2. Record adjusting entries, if any.
3. Record eliminating entries.
4. Complete consolidating worksheet.
5. Prepare consolidated financial statements.
242
How does a parent company record a subsidiary?
An an investment.
243
How is an in transit intercompany transaction handled?
Make an adjusting entry on the consolidating worksheet to complete the transaction as though it had been received by the receiving company.
244
What is the effect on an investment in subsidiary account when the parent accounts for its investment using the equity method?
The carrying amount of the investment would change with changes in the equity accounts of the subsidiary, including:
- Increasing with reported subsidiary profits/decreasing with reported subsidiary losses
- Decreasing with the payment of dividends by the subsidiary
- Decreasing for “depreciation/amortization” of the excess of fair value over book value at the date of investment
245
What will be the difference(s) in the consolidated statements resulting from the parent using the cost method or the equity method to account for an investment in a subsidiary to be consolidated?
There will be no difference in the final consolidated statements based on which method the parent uses to account for its investment in a subsidiary. The consolidated statements will be the same regardless of which method is used; on the consolidating process will be different.
246
What steps should be followed to make adjusting entries to help derive the consolidated financial statements?
1. Determine if any transactions are in transit between the affiliated entities
2. Record an entry on the consolidating worksheet to treat in transit transactions as though they were completed
247
What is the amount at which any non controlling interest is recognized in the eliminating entry at the date of business combination?
Fair value of non controlling interest % claim to consolidated net assets attributable to the subsidiary. This would include its claim to the subsidiary’s net assets at fair value and any goodwill recognized in the combination.
248
List some examples of Intercompany amounts to be eliminated during a consolidation.
- Receivables/payables
- Interest
- Dividends
- Bonds
249
Where will a non controlling account show in consolidated financial statements?
On the consolidated balance sheet as a separate item within shareholders equity.
250
What are the possible accounting methods a parent can use to carry on its books an investment in a subsidiary that will be consolidated?
The parent can use:
- Cost Method
- Equity Method
- Any other method it chooses
Whatever method it uses, the investment account will be eliminated on the consolidating worksheet. (Only the cost and equity methods have been used on prior exams.)
251
When a parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?
After recording the investment in the subsidiary on its books, in normal circumstances, the parent will only recognize its share of the subsidiary’s dividends declared/paid as dividend income. It will not recognize on its books its share of the subsidiary’s reported net income/loss, nor will it adjust its investment account for the subsidiary’s income/loss or dividends.
252
What does the investment eliminating entry on the consolidating worksheet accomplish?
1. It eliminates the investment account (in the subsidiary) brought on to the worksheet by the parent against the shareholders equity accounts (of the subsidiary) brought on to the worksheet by the subsidiary
2. In the process, it adjusts the subsidiary’s identifiable assets and liabilities to fair value at the date of acquisition and recognized goodwill, if any
253
When a parent uses the cost method to carry on its books an investment in a subsidiary that it will consolidate, what is the purpose of the reciprocity entry made on the consolidating worksheet?
The reciprocity entry adjusts the parent’s investment account for changes in the subsidiary’s retained earnings since the business combination up to the beginning of the period being consolidated that have not been recognized in the parent’s investment account because it is using the cost method of accounting.
254
How is NCI Equity calculated if you have information about S’s net book value (NBV) and the acquisition premium?
NCI Equity is calculated by:
1. Adding any acquisition premium (revaluations of identifiable assets including goodwill) to S’s (NBV)
2. Deducting any depreciation or amortization of the acquisition premium since the of acquisitions, and
3. Multiplying S’s adjusted NBV by the NCI % ownership
255
How is the ending balance of NCI Equity calculated if you have the beginning balance of NCI Equity and the current year performance of S?
The beginning balance of NCI Equity is rolled forward by adjusting for the NCI % of the following:
1. Add S’s current year net income
2. Deduct S’s current year dividends
3. Deduct current year impairment loss
4. Deduct current year depreciation or amortization of the acquisition premium
256
Where does the noncontrollling interest in a subsidiary’s income/loss and assets/liabilities get reported in consolidated financial statements?
- Non-controlling interest in a subsidiary’s net income or net loss gets reported as a separate line item in the consolidated income statement
- Noncontrolling interest in a subsidiary’s assets and liabilities get reported as a separate line item in shareholders’ equity in the consolidated balance sheet
257
When a parent uses the equity method to carry on its books an investment in a subsidiary that it will consolidate, what entries does the parent make on its books related to the subsidiary?
Adjusts on its books the carrying value of its investment in the subsidiary to reflect:
- The parent’s share of the subsidiary’s income or loss
- The parent’s share of dividends declared by the subsidiary
- The amortization/depreciation of the difference between fair market value of identifiable assets (but not goodwill) and the book value of those assets
258
What is the effect on consolidated values when the fair values of a subsidiary’s identifiable assets are less than the subsidiary’s book values for those assets at the date of a business combination?
On the consolidating worksheet:
- The identifiable assets are written down to fair value at the date of the business combination
- Any depreciation/amortization expense on those assets taken by the subsidiary will be reduced on the consolidating worksheet to an amount based on the lower fair values
259
What amount of intercompany revenues and expenses must be eliminated on the consolidating worksheet?
The full amount (100%) of revenues and expenses that resulted form intercompany transactions must be eliminated, even if the transaction did not result in a profit to the “selling” affiliate.
260
What is the treatment of intercompany transactions and balances on the consolidating worksheet?
Eliminate all intercompany transactions and balances.
261
What are the only types of transactions recognized for consolidation?
Transactions with non-affiliates.
262
List the main types of intercompany transactions and intercompany balances.
- Receivables/payables
- Revenues/expenses
- Inventory
- Fixed assets
- Bonds
263
What amount of intercompany receivables and payables must be eliminated on the consolidating worksheet?
The full amount (100%) of receivables and payables that resulted from intercompany transactions must be eliminated on the consolidating worksheet.
264
What is an intercompany inventory transaction?
When on affiliated entity sells goods to be resold (merchandise inventory) or used (raw materials inventory) by the the buying affiliate, an intercompany inventory transaction has occurred.
265
What are the accounts (on a consolidating worksheet) that may be affected by an intercompany inventory transaction?
- Sales/purchases
- Net income/loss
- Ending inventory
- Beginning inventory
266
What amount of intercompany inventory sales and intercompany inventory purchases must be eliminated?
The full amount (100%) of intercompany inventory sales and intercompany inventory purchases must be eliminated (against each other) on the consolidating worksheet, even if the sale was at no profit to the selling affiliate.
267
Since intercompany inventory sales and intercompany inventory purchases exactly offset each other, resulting in no net effect on consolidated income, why must they be eliminated?
Intercompany inventory sales and intercompany inventory purchases must be eliminated so that the absolute amount of sales and purchases will not be overstated on the consolidated income statement. Such overstatements would misrepresent the level of operating activity for the firms.
268
What is the entry to eliminate intercompany inventory sales and intercompany inventory purchases on the consolidating worksheet?
```
DR Intercompany Sales
CR Purchase (Inventory)
```
The entry would be for the full amount of intercompany sales/purchases during the period
269
What is the entry on the consolidating worksheet to eliminate intercompany inventory profit that is in ending inventory?
DR: COGS (or inventory) - I/S
CR: Ending Inventory - B/S
The entry eliminates the profit brought on the worksheet by the selling affiliate and reduces the ending inventory brought on the worksheet by the buying affiliate to cost from an outsider.
270
What are the differences between when a 100% owned subsidiary sells goods for a profit to a parent and when a less than 100% owned subsidiary sells goods for a profit to a parent?
In both cases, the full amounts of the intercompany sales and purchases have to be reversed. The full amount of profit in ending inventory has to be eliminated (by reducing profit and reducing inventory carrying value). When the subsidiary is 100% owned, the parent (and parent shareholders) absorb the entire effect of the reductions. When the subsidiary is less than 100% owned, the reductions (in profit and asset value) are allocated between the parent and the non controlling interest based on % ownership....
271
List the consolidation accounts affected by intercompany fixed asset transactions.
- Net income
- Fixed asset
- Accumulated depreciation
- Depreciation expense/Accumulated depreciation
272
If not eliminated, what effect will the intercompany sale of a fixed asset at a gain have on the reported value of the fixed asset for consolidated statement purposes?
Unless the appropriate eliminating entry is made, the intercompany sale of a fixed asset at a gain will result in an overstatement of the value of the fixed asset on consolidated financial statements.
273
What is the eliminating entry for consolidating purposes that would be necessary immediately following an intercompany sale of a fixed asset at a gain?
DR: Fixed Asset (to reestablish original cost from non affiliate)
DR: Gain (to elimate intercompany gain on sale)
CR: Accumulated Depreciation ( to reestablish accumulated depreciation written off by selling affiliate)
274
How is a gain or loss on an intercompany sale of a fixed asset confirmed (recognized) for consolidated statement purposes?
A gain or loss on an intercompany sale of a fixed asset is confirmed through the depreciation expense taken each period by the buying affiliate on the intercompany profit or loss. When the sale was at a gain (loss), the buying affiliate will take more (less) depreciation than the selling affiliate would have taken. That difference (each period) confirms a part of the gain or loss each period.
275
What effect does an intercompany sale of a fixed asset by a less than 100% owned subsidiary to a parent have on the consolidated financial statements that is different from the sale by a parent to a subsidiary or by a 100% owned subsidiary to a parent?
In all cases the full amount of any intercompany gain or loss will be eliminated; however, if the sale is from a less than 100% owned subsidiary, the gain or loss ( and subsequent elimination adjustments of depreciation expense) will be allocated on the worksheet between the parent and the noncontrolling interest in proportion to their ownership %.
276
If not eliminated, what effect will the intercompany sale of a fixed asset at a loss have on the reported value fo the fixed asset for consolidated statement purposes?
Unless the appropriate eliminating entry is made, the intercompany sale of a fixed asset at a loss will result in an understatement of the value fo the fixed asset on consolidated financial statements.
277
For consolidated purposes, what accounts can be affected by intercompany bonds?
- Bonds payable
- Premium or discount on bonds payable
- Investment in bonds
- Premium or discount on investment in bonds
- Interest income/interest expense
- Interest payable/interest receivable
278
How does the gain or loss on constructive retirement of intercompany bonds get recognized on the books of the separate affiliated companies?
The gain or loss on constructive retirement of intercompany bonds get recognized on the books of the separate affiliated companies through the amortization on their separate books of the premiums and/or discounts on the bond investment and/or the bonds payable.
279
When do intercompany bonds exist?
When one affiliate owns (as an investment) the bonds issued by another affiliate (a liability).
280
What determines the amount of any net gain or loss resulting from bonds becoming intercompany?
The sum or difference between the premium or discount on the bond investment (of the buying affiliate) and the premium or discount on the bonds payable (of the issuing affiliate).
Gain would result from eliminating:
- Premium on bond payable or
- Discount on investment
Loss would result from eliminating:
- Discount on bond payable or
- Premium on investment
281
What eliminating entry would be required for consolidating purposes immediately following an intercompany bond purchase that involved a discount on bonds payable and a premium on bond investment?
DR: Bonds payable at face amount
Loss on constructive retirement
- sum of premium on B/I + Discount on B/P
CR: investing in I/C Bonds at face amount
CR: Premium on I/C bond invest - for full amount
CR: Discount on I/C bonds payable - for I/C amount
282
What are 2 objective differences between US GAAP and IFRS determining control?
1. Under US GAAP, only outstanding voting rights are used to measure control. Under IFRS, securities currently exercisable or convertible into voting rights are used in assessing control.
2. Under US GAAP, only if an entity has more than 50% voting ownership can it have control. Under IFRS, an entity may have control even when it does not have more than 50% voting control.
283
What is the main difference in the preparation of financial statements between consolidating financial statements and combining financial statements?
In consolidating financial statements, the investment accounts of the parent company in the other companies being consolidated are eliminated against the parents % ownership of the equity of those companies. In combining financial statements, any investment one combining company has in another combining company is eliminated against the owned company’s equity in the amount of the investment, not in the amount of % ownership.
284
What is the main different between when combined financial statements would be appropriate and when consolidated financial statements would be appropriate?
Consolidated financial statements must be prepared only when one of the companies being consolidated (a parent company) has controlling interest, either directly or indirectly, in the other companies being consolidated. Combined financial statements can be prepared when there is no single company (parent company) that has control of the companies being combined.
285
What is the only legal form of business combination requiring consolidated statements?
Business combination resulting from a legal acquisition.
286
What is a majority owned subsidiary that is not consolidated called and how is it accounted for?
A majority owned subsidiary that is not consolidated is an unconsolidated subsidiary and would be accounted for as an investment assets by the parent, using either fair value or the equity method of accounting.
287
What are the differences between a legal merger or legal consolidation and a legal acquisition that determine whether or not consolidated statements will be required?
In a legal merger or legal consolidation only one entity exists after the combination; therefore, there is no need for a consolidated statement. In a legal acquisition, 2 separate legal entities survive, but under common control. Their financial statements must be consolidated.
288
When are consolidated statements required?
Under 2 major circumstances:
1. When a firm is the primary beneficiary of a variable interest entity (VIE), the VIE must be consolidated with the primary beneficiary
2. When a firm has a majority owned (>50% of voting stock) subsidiary, the subsidiary must be consolidated with its parent unless the parent lacks actual effective operating or financial control
289
Which agency enforces GAAP?
The SEC
290
Does the SEC have legal authority to prescribe acctg standards to public companies?
Yes
291
What does the SEC strive to do?
Ensure that there is adequate information in the public domain before a company issues or trade securities.
292
How many divisions does the SEC have?
5
1. The Division of Corporation Finance
2. The Division of Enforcement
3. The Division of Trading and Markets
4. The Division of Investment Management
5. Division of Economic and Risk Analysis
293
Does the SEC have the authority to penalize firms when financial statements are not in accordance with GAAP?
Yes, it may penalize firms.
294
When the SEC finds and acctg. Irregularity, what happens?
The SEC sends a “deficiency” letter to a registrant when and accounting irregularity is found.
295
Define “Financial Reporting Releases (FRR).”
Formal pronouncements that rank the highest in authority for public companies.
296
Define “Staff Accounting Bulletins (SAB).”
Bulletins that provide the SEC current position on technical issues.
297
What purpose do Accounting and Auditing Enforcement Releases (AAER) serve?
They report the enforcement actions taken against accountants.
298
What does the Securities Act of 1934 do?
It regulates the trading of securities after they are issued and requires periodic reporting.
299
Where are the formal rules of the SEC found?
In the Code of Federal Regulations
300
What does registration with the SEC require?
Extensive disclosures about the company, management, and the intended use of the proceeds from the issue.
301
How many years of balance sheet data are required by the SEC?
2 years
302
How many years of the income statement data are required by the SEC?
3 Years
303
How many years of cash flow data are required by the SEC?
3 Years
304
How many years of selected financial data are required by the SEC?
5 Years
305
What are the steps in the offering process?
1. Issuer
2. Underwriter
3. Dealer
4. Public
306
Within how many days after the fiscal year end of a large accelerated filer does a 10-K need to be filed?
60 days
307
What information does MD&A provide?
A discussion of important aspects of the firm from the viewpoint of management.
308
Within how many days after the end of the quarter does a company need to file the 10-Q?
- 40 days for large accelerated filers and accelerated filers
- 45 days for non accelerated filers
309
What information does the 8-K provide?
Significant events affecting the company.
310
What law prohibits the bribing of foreign officials?
The Foreign Corrupt Practices Act of 1977
311
Does the Sarbanes-Oxley Act allow auditors to complete non-audit services for clients?
No.
312
Where must earnings per share (EPS) be disclosed?
On the face of the financial statements.
313
What is the term that refers to the following concept?
If a year’s preferred dividend is not paid (skipped), no other dividends may be paid before the skipped dividends (dividends in arrears) are paid.
Cumulative
314
What does a complex capital structure include?
Typically includes common stock, along with equity contracts and convertible securities.
315
What is a simple capital structure?
One in which the corporation has outstanding only:
- Common stock or
- Common stock and nonconvertible preferred stock
316
What amount of preferred dividend is subtracted for cumulative preferred stock?
One full year’s dividends regardless of the amount declared or paid.
317
What amount of preferred dividends is subtracted for noncumulative preferred stock?
Amount declared.
318
How is basic earnings per share calculated?
(Net Income - Preferred Dividends)
Divided
Weighted average common shares outstanding
319
How is diluted EPS calculated?
Net income available to common adjusted for effected of potential common stock
Divided
Weighted average common shares + Shares issuable from potential common stock
320
What is the tax effect for preferred stock dividends?
There is no tax effect.
321
List the 2 types of EPS.
1. Basic
| 2. Diluted
322
How is BEPS calculated if common stock and nonconvertible preferred stock are outstanding?
(Net Income - Preferred Dividends)
Divided
Weighted Average Common Shares Outstanding
323
When are contingent shares considered outstanding?
When their conditions have been met.
324
Define “contingent shares.”
Shares issuable for little or no cash consideration upon satisfaction of certain conditions.
325
What is the accounting effect of a stock split dividend between balance sheet date and issuance?
Adjustment of all EPS amounts for stock split or dividend.
326
What is the general rule for stock splits and dividends in the weighted average share calculation?
Treat as outstanding from inception of firm (“AS IF”)
327
Which potential common stock is the most dilutive when there are multiple PCSs?
The one with the lowest ratio of numerator effect/denominator effect.
328
What is the order of inclusion of preferred common stock into diluted EPS?
In order of most dilutive first.
329
What is the treatment of antidilutive preferred common stock in EPS?
It is ignored.
330
What is an antidilutive potential common stock?
One that increases EPS when added into basic EPS.
331
Describe the diluted EPS formula.
Net Income available to common adjusted for effects of potential common shares
Divided
Weighted average common shares plus shares issuable from potential common shares
332
What does diluted EPS include?
Includes securities that may become common stock in the future, such as convertible stock and stock options, in addition to actual shares of common outstanding.
333
Are diluted potential common stock incorporated into diluted EPS?
Yes, they are incorporated.
334
When are options antidilutive?
When the option price exceeds the market price.
335
When bonds are sold at premiums, what will interest expense reflect?
It will reflect periodic amortization.
336
When is the dilution potential of diluted EPS determined for ordinary shares under the IFRS?
They are determined independently each year.
337
Describe the operating profit or loss test for operating segments.
The operating segment’s operating profit or loss (absolute value) is 10% or more of the greater of the next 2 amounts (absolute value):
1. Combined operating profit of all segments not reporting losses
2. Combined loss of all segments that reported operating losses
338
Describe the identifiable asset test for operating segments.
The operating segment’s identifiable assets are 10% or more of the combined assets of all reported operating segments.
339
List the requirements for aggregation of segments.
Similar in each of these areas:
- The nature of products and services
- The nature of the production processes
- Customer type or class
- Distribution methods for products and services
- The nature of the regulatory environment
340
List the 3 characteristics of operating segments.
1. The segment is involved in revenue producing and expense incurring activities
2. The operating results of the operating segment are reviewed by the company’s chief operating decision maker on a regular basis
3. There is discrete financial information available for the operating segment
341
List the quantitative tests for operating segments.
- Revenue
- Operating profit or loss
- Identifiable assets
342
Describe the 75% rule for segments.
The total external revenue reported by reportable segments must be at least 75% of the company’s total consolidated revenues.
343
Describe the revenue test for operating segments.
The operating segment’s revenue from all sources (internal and external) is 10% more of the combined (internal and external) revenues of all of the company’s operating segments.
344
When are revenues recognized in interim reporting?
Revenues are recognized in each interim period as they would be in an annual period.
345
Describe the general rule for expense recognition in interim reporting when an expense is not directly related to revenue.
- If the cost or expense has no relationship to other quarters, recognize the entire expense in the quarter in which the cost was incurred.
- If the cost or expense benefits other quarters, allocate the cost to those other quarters and recognize the appropriate amount of expense in those quarters
346
Describe the general rule for expense recognition in interim reporting when an expense is directly related to revenue.
The expense is recognized in the same period as the related revenue.
347
List the steps in estimating income tax for interim reporting.
1. Annual rate is reestimated
2. Rate is applied to the total interim income through the end of the current period
3. The income tax reported in previous periods is subtracted from the results in step 2 to yield the income tax expense for the current period
348
What are temporary declines in inventory?
Inventory declines that are expected to reverse by year end.
349
How are temporary declines reported at interim?
They are not recognized as losses in the interim period in which they occur.
350
What are permanent declines in inventory?
Inventory declines that are not expected to reverse in the current year.
351
How are permanent declines in inventory value accounted for?
- They are recognized as losses in the interim periods in which they occur
- Later recoveries are recognized as gains only to the extent of previous losses
- They cannot be written up above cost
352
When is the gross margin method for inventory permitted?
- it is permitted for interim reporting but not annual reporting
- use must be disclosed in footnote
353
How is a change in estimate accounted for during an interim period?
It is accounted for in the interim period in which it is made.
354
List the required interim information that must be reported for segments.
- External revenues (other than from intersegment sales)
- intersegment revenues
- Segment profit or loss
355
How are cost accounting variances accounted for in interim reporting?
Those expected to be absorbed by the end of the current year are deferred.
356
Is the gross margin method acceptable for annual reporting?
The gross margin method is acceptable for interim reporting but not for annual reporting.
357
How is LIFO liquidation in an interim period accounted for when restoration is expected?
The interim period COGS should reflect the estimated cost of the replacement.
358
How is LIFO liquidation in an interim period accounted for when restoration is not expected?
The interim period COGS should reflect the actual cost of the layer liquidated.
359
How are accounting principle changes accounted for in interim reporting?
Accounting is the same as for an annual period. Disclosures are required for the interim period of change and for subsequent interim periods.
360
Describe the overall guideline for interim reporting under U.S. acctg standards.
Integral view. Interim periods are an integral part of the annual period.
361
Describe the overall guidelines for interim reporting under international accounting standards.
Discrete view, interim periods are stand along periods.
362
Describe a modified cash basis of accounting.
A modified cash basis of acctg results from adjustments made to cash basis accounting. Specifically, while most items continue to be accounted for using the cash basis, some items are accounted for using the accruals basis. As a consequence, the financial statements reflect accounts and amounts based on a combination of the cash basis and the accrual basis.
363
What does the Private Company Council do?
It works with the FASB to set acctg standards for private companies.
364
What is a private company?
A private company is on that is not a public company. The PCC provides a definition of a public company as one that is required to file or furnish financial statements with a regulatory agency related any type of securities (debt and equity), whether those securities are traded on exchanges or over the counter.
365
What modification is allowed for private companies related to accounting for goodwill?
The goodwill can be amortized over a period not to exceed 10 years.
366
What modification is allowed for private companies related to accounting for interest rate swaps?
The hedge accounting for a receive variable/pay fixed interest rate swap is simplified. The private company can assume 100% effectiveness and can use settlement value as a practical expedient for fair value.
