CPA Excel - Financial Accounting Standards

Question 1

What is GAAP?

Answer 1

The composition of GAAP includes principles, methods, and procedures that are generally accepted by the accounting profession.

Question 2

What is the basic theory of accrual accounting?

Answer 2

The accrual basis of accounting recognizes all resource changes when they occur. Revenues are recognized when earned, regardless of the period of cash collection, expenses are recognized when incurred, regardless of the period of cash payment.

Question 3

What is the FASB Codification?

Answer 3

The FASB Codification Research System is the online, real-time database by which users access the Codification through the Internet.

Question 4

What are the goals of FASB Codification?

Answer 4

1. Simplify the structure and accessibility of authoritative GAAP;
2. Provide all authoritative literature in a single location;
3. Reduce the time and effort required to research an accounting issue;
4. Reduce the risk of noncompliance with GAAP;
5. Facilitate updating of accounting standards;
6. Assist the FASB with research and convergence (IFRS) efforts.

Question 5

What is the overall structure of the Codification?

Answer 5

ATSSSP - Areas, Topics, Subtopics, Sections, Subsections, Paragraphs

Question 6

What is the objective of financial reporting?

Answer 6

To provide information about the entity useful to current and future investors and creditors in making decisions as capital providers.

Question 7

What are qualitative characteristics of accounting information?

Answer 7

Faithful Representation and Relevance (FaR), Comparability, Verifiability, Timeliness, Understandability

Question 8

List the PRIMARY qualitative characteristics of accounting information.

Answer 8

Faithful Representation and Relevance (FaR)

Faithful representation (Completeness, Neutrality, Free from material error)

Relevance (Predictive value and Confirmatory value)

Question 9

List the ENHANCING qualitative characteristics of accounting information.

Answer 9

Comparability, Verifiability, Timeliness, Understandability

Question 10

What are the assumptions in the conceptual framework? (EGUT)

Answer 10

Entirely from you GUT

Entity (separate and distinct from owners)

Going concern

Unit of measurement

Time Period (indefinite life broken into time frames)

Question 11

What are the principles in the conceptual framework?

Answer 11

His Revenues Matched Fully

Historical Cost
Revenue Recognition Principle
Matching Principle
Full Disclosure Principle

Question 12

What are accounting constraints in the conceptual framework?

Answer 12

Exceptions to the strict application of GAAP.

Materiality (use professional judgement)

Cost Effectiveness

Used to be constraint but no longer - conservatism/prudence - in conflict with neutrality

Question 13

Define Fair Value for accounting purposes.

Answer 13

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.

Question 14

What is the difference between an entry price and an exit price under the Fair Value Framework?

Answer 14

Entry Price: the price paid to acquire the asset or the price received to assume the liability = Transaction price/Cost

Exit Price: Fair value of an asset or a liability is the price that would be received to sell an asset or paid to transfer a liability = Fair Value

Question 15

What is the appropriate accounting treatment for any difference between entry and exit price at time of initial recognition?

Answer 15

A gain or loss is recognized in earnings at initial recognition of the asset or liability (unless otherwise required by GAAP for that item).

Question 16

What are the techniques/approaches used to determine fair value? (MIC)

Answer 16

Market Approach

Income Approach

Cost Approach

*Valuation techniques should be consistently applied!

Question 17

When is a change in technique to determine fair value appropriate?

Answer 17

When the change results in a more REPRESENTATIVE fair value.

Question 18

What are inputs in terms of determining fair value?

Answer 18

Refer to the various assumptions that market participants would use in determining fair value, including assumptions about the risk inherent in using a particular valuation technique, as well as the risk inherent in using various inputs (data, assumptions, etc.) with each valuation technique.

Question 19

What is the difference between observable and unobservable inputs?

Answer 19

Observable: Inputs used in pricing an asset, liability, or equity item that are developed based on market data obtained from sources independent of the reporting entity.

Unobservable: Inputs that reflect the reporting entity’s own assumptions used in pricing the asset, liability, or equity item that are developed based on the best information available in the circumstances.

Question 20

What are the three levels of the fair value hierarchy?

Answer 20

Level 1: Unadjusted quoted prices in active markets for assets or liabilities or equity items identical to those being valued

Level 2: Inputs observable that do not meet all conditions for Level 1

Level 3: Unobservable inputs for the item being valued, should be used to determine fair value only to the extent observable inputs are not available