Conceptual Framework - Area 1

Question 1

Converting Cash to Accrual

Answer 1

SPEAR-BAR

Sales + Ending AR - Beginning AR

Question 2

The SEC required form used to report major events that shareholders should be made aware of on a current basis

Answer 2

Form 8K

Question 3

When do you report declines in inventory value for interim periods?

Answer 3

When the decline in inventory value is deemed to be non-recoverable.

If the decline is expected to be recovered by year-end, inventory should not be written down.

If the decline was expected to be recoverable, but was not, it should be recorded as of the date it was discoverable to NOT be recovered.

Question 4

Cash flows from investing activities include:

Answer 4

1) making and collecting loans (excluding those acquired specifically for resale),
2) acquiring and disposing of property, plant, and equipment, and other productive assets, and
3) purchases, sales, and maturities of debt and equity securities (excluding those acquired specifically for resale. Borrowing money and repaying amounts borrowed, or otherwise settling the obligation represents cash flows from financing activities.)

Question 5

Basic EPS

Answer 5

(Net Income-Preferred Stock Dividends) / Weighted Average outstanding Common Shares

Weighted average of shares outstanding = Amount of Change / months remaining until of the year
*Splits and Dividends occurring after year end, but before the issue of Financial Statements, are included in the calculation.

Question 6

How is Discontinued Operations calculated and reported?

Answer 6

DO = Operating Loss for the Year + Sale of Operation Loss(Gain) - Tax on Sale
Results of all discontinued operations are reported net of tax as a separate component on the income statement. Include total loss of operations regardless of when of when the operation is declared as discontinued.

If a DO is being disposed of in a year following the declaration, a loss is recognized in both years. If a loss is expected on the sale of the DO, an impairment occurs in the year it was DISCOVERED to be expected. IE - loss on sale of DO is discovered in year 1, but sale happens in year 2, the loss on sale estimated is recorded as an impairment in year 1.

Question 7

How is Comprehensive Income calculated?

Answer 7

Comprehensive income is the sum of net income and other comprehensive income. It aims to show all the components that change the equity except for owner transactions. All non-owner transactions are included in the comprehensive income.

Owner Transactions I.E. dividends paid to shareholders are not included in Comprehensive Income.

Question 8

Which statements must NFP present?

Answer 8

Nonprofit organizations must present, at a minimum, a statement of financial position, a statement of activities, and a statement of cash flows.

Question 9

How are NFP investments measured and reported?

Answer 9

All investments are required to be measured at fair value. Gains and losses on the investments are included in the statement of activities as increases and decreases, respectively, in net assets without donor restrictions unless the use of the securities is restricted by donors. Any dividends, interest, or other investment income are to be included in the statement of activities as earned.

Question 10

Which transactions are recognized on the income statement?

Answer 10

Equity Securities, Trading Debt Securities, Fair Value Hedge, Foreign Currency Transaction

Question 11

Which Transactions are recognized in Other Comprehensive Income?

Answer 11

Foreign Currency Translation, AFS Debt Security, Cash Flow Hedge, Foreign Currency Hedge

Question 12

What constitutes Financing Activities in the Statement of Cashflows?

Answer 12

The Financing Activities section of a cash flow statement includes transactions where cash is obtained from or returned to owners and lenders and also includes a net change in overdrafts for the period.

Issuing company stock
Purchasing treasury stock
Getting a loan & paying on a loan
Paying dividends
Issuing bonds

Question 13

Are non-cash items on the Statement of Cashflows?

Answer 13

No. Remember when doing MCQs, items that do not affect cash are not included. Example: converting debt into stock.

Question 14

What items are involved in cash flows from Operating Activities?

Answer 14

Cash received from customers
Dividend income
Interest expense/income
Cash paid for business expenses

Question 15

What is the difference between the Direct and Indirect method for the Statement of Cashflows?

Answer 15

The only difference is the operating activities section.
The Indirect method begins with Net Income and works backwards.
The Direct method shows specific activities such as “Cash paid to Customers” or Cash paid to Suppliers”

There is no difference in Investing or Financing activities in the two methods

Question 16

What is the criteria for accruing contingent liabilities?

Answer 16

They need to be both Probable and Reasonably Estimated.

Question 17

Should disclosures for Prospective Financial Statements include Summary of significant accounting policies, summary of significant assumptions, or both?

Answer 17

Both

Question 18

What are Quasi-Endowments?

Answer 18

Assets with internal restrictions.

Endowments, Term Endowments, and restricted assets are all asssets with donor restrictions.

Question 19

NFP - How are Conditional Contributions accounted for?

Answer 19

Conditional contributions are recognized when earned. They are maintained as a refundable advance until the conditions have been met.

Question 20

What is the difference between the Projected Benefit Obligation (PBO) and the Accumulated Benefit Obligation (ABO)?

Answer 20

PBO is the actuarial present value of benefits determined by estimated employee services to be rendered after the specified date. -PROJECTED-

ABO pertains to employee services rendered prior to a specified date. -ACCUMULATED-

Question 21

How are encumbrances classified?

Answer 21

They are classified as restricted assets.

NOT LIABILITIES

Question 22

When are preferred stock dividends not included in EPS?

Answer 22

When the preferred stock is convertible to common stock.

*When preferred stock is cumulative and non-convertible, the dividends included in the EPS calculation regardless if they were paid or not.

Question 23

When calculating Dilutive EPS, what is included with convertible bonds?

Answer 23

The Tax Rate and interest rate. Interest needs to be separated and applied to net income. When calculating, times the number of outstanding convertible bonds by the dollar value of common stock each converts to. Then apply the tax rate and include the convertible bonds net of tax in the EPS calculation.

Question 24

When calculating weighted average number of shares for EPS, how are stock splits and stock dividends applied?

Answer 24

They are to the beginning of the year. Meaning, that if you have a stock dividend of 20%, the 20% should be included in each calculation since the beginning of the year. Make sure to include the month fraction for each retrospective application.

If you have both a stock dividend and stock split. Ensure you apply each successively. Apply the one that happened first and then apply the other one.

Question 25

What is the journal entry for a stock dividend?

Answer 25

Dr 
Retained Earnings (Fair Value)

 Cr
 Common stock dividends distributable (Par Value)
 APIC (Plug)

If it greater than 20% no APIC will be required and RE and Common stock will be dr and cr for their par value respectively
DR RE (Par Value)
CR Common Stock (Par Value)

Question 26

What does COPAS stand for?

Answer 26

Consideration
Obligations 
Price
Allocation
Satisfaction

Question 27

What are the two primary qualitative characteristics?

Answer 27

1 Faithful Representation
○ Completeness
○ Neutral
○ Free from error

2 Relevance
○ Predictive value
○ Confirmatory value
○ Material

Question 28

What are the four enhancing characteristics?

Answer 28

● Comparability
● Verifiability
● Timeliness
● Understandability

Question 29

What are the two primary constraints of accounting?

Answer 29

Cost vs Benefit

Materiality

Question 30

What are the requirements for the filer types?

Answer 30

Large accelerated filer: MV of $700 million or more. 10-K within 60 days of fiscal year end, and the 10-Q within 40
days of the end of the quarter.

Accelerated filer: MV between $75 and $700 million and
annual revenues of $100 million or more. 10-K within 75 days of
fiscal year end, and the 10-Q within 40 days of the end of the quarter.

Nonaccelerated filer: MV of less than $700 million with
annual revenue of less than $100 million, or a market value of less than $75
million. 10-K within 90 days of fiscal year end, and the 10-Q
within 45 days of the end of the quarter.

Question 31

Inventory Turnover Ratio

Answer 31

COGS / Average Inventory

Question 32

What is included in a full set of financial statements?

Answer 32

A Full Set of Financial Statements includes: Statement of financial position, Statement of earnings, Statement of comprehensive income, Statement of cash flows and Statement of changes in owners’ equity

Question 33

How does the percentage of ownership affect the consolidation of asset and liability accounts on the consolidated financial statements?

Answer 33

The percentage of ownership does not affect the accounts. As long as the sub qualifies to be consolidated. The consolidated should show the full amount less any intercompany interaction.

Question 34

How do you calculate goodwill?

Answer 34

Acquisition price / fair value of identifiable net assets

Question 35

Which accounts are eliminated in consolidation?

Answer 35

Any intercompany transactions. Retained earning of the subsidiary and the investment in subsidiary account.

Elimination Entry:
DR - Sub company
Sub Retained earnings

 CR - From Parent Company
 Investment in Sub

So you are eliminating a parent company investment and eliminating the retained earnings of the sub. Think of these as an intercompany transaction as they are both “owned” by the parent and need to be eliminated.