CPA FAR 3_TLR Flashcards
Rein Inc. reported deferred tax assets and deferred tab liabilities at the end of the previous year and at the end of the current year. For the current year ending, Rein should report deferred income tax expense or benefits equal to the:
the sum of the net changes in deferred tax assets and deferred tax liabilities
The basic way to compute income tax expense has measured the value of deferred tax assets and deferred tax liability at the end of the period.
Therefore, income tax expense is basically the sum of the changes in those deferred tax assets and liability accounts.
Derivative instruments
Derivative Instruments must be recognized on an entity’s balance sheet at fair value. The gains or losses resulting from changes in the derivatives fair value during the period must be included in net income of the period unless the derivative is used as a hedge and the hedge qualifies for hedge accounting.
SEC Filing Deadlines
Three categories of filers
Non-accelerated
Accelerated
Large Accelerated
Non-accelerated filers have public floats less than $75 Million - 10-K must be filled within 90 days and 10-Q after 45 days after the end of fiscal year.
Accelerated have a public float of at least $75 M but less than $700 M, must file 10-K within 75 days and 10-Q within 40 days after the end of fiscal year.
Large Accelerated filers have public float greater than $700 M or more - 10-K must be filed within 60 days and 10-Q within 40 days after the end of the fiscal year.
Stock Rights
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Stock Rights
Allow existing shareholders to purchase additional shares at a price that is USUALLY below the current market price on the data the rights are granted
Granting of stock rights is a MEMO ENTRY only
Exercise of Rights JV
Cash XXX
Common Stock (par value) xxxx
Additional PAID IN Capital xxxx
In a statement of cash flows, which of the following items is reported as a cash outflow from FINANCING activities?
- Payment to retire mortgage notes
- Interest payments on mortgage notes
- Dividend payments
Answer: I & III
Financing activities include cash paid for dividends and principal payments to creditors.
Remember Financing activities include all transactions related to obtaining resources from owners and providing them with a return on or of their investments and to obtain and repay debt, including short term and long terms debt, mortgages, capital leases,self-financed debt, and debt incurred to acquire treasury stock.
Interest payments are cash flows from OPERATING activities.
Troubled Debt Restructuring
Assets Conveyed in a troubled debt restructuring should be valued at their FAIR value in computing a gain or loss.
Pension Expense
S Service Cost (+)
I Interest on Pension Benefit Obligation (+)
R Return on Plan Asset -expected (-)
P Prior Service Cost Amort (+)
A Actuarial Gain (-) or Loss (+)
T Transition Asset (-) or Obligation (+)
Stock Dividends
Stock Dividends are accounted for by reclassifying a portion of retained earnings as contributed capital.
THEY DO NOT REDUCE ASSETS OR INCREASE LIABILITIES. Therefore, total stockholder’s equity is not changed.
Stock dividends are a distribution of the corporation’s own stock (treasury stock or newly issued shares) to stockholders in proportion to the number of shares outstanding.
They do NOT change the par value per share of shareholder’s proportional interest in the corporation, BUT THEY DO INCREASE THE NUMBER OF SHARES ISSUED AND OUTSTANDING.
A stock dividend does not change assets, liabilities or TOTAL stockholder equity. It merely transfers amounts between equity accounts.
Stock Dividends ARE used in calculating the weighted average number of shares outstanding for EPS computations and are GIVEN retroactive treatment as if the shares had been outstanding the entire period.
Stock dividends represent a return ON investment to shareholders.
The Modified accrual basis of Accounting
This is used for GOVERNMENTAL FUNDS and characterized by recognition of revenue prior to receipt of cash: governmental revenues and other governmental fund financial resource increments must be 1) MEASURABLE and 2) AVAILABLE (collectible within or soon after the current period so that it is available for payment of obligations in current during the same period).
The exception is for unmatured interest on general long-term debt which should be recognized when due.
FUND TYPES
Governmental Funds – MODIFIED ACCRUAL • General Fund • Special Revenue Funds • Capital Project Funds • Debt Service Funds • Permanent Funds
Proprietary funds – ACCRUAL ACCT’G
• Enterprise Funds
• Internal Service Funds
*Proprietary funds except for internal service funds are business-type activities
Fiduciary Funds – ACCRUAL ACCT’G
• Trust Funds (investment, private purpose, pension
• Agency Funds
Stock as Compensation
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Issuing stock for services provided is considered a non-monetary exchange
Record at FV of stock issued or services performed, whichever is more clearly evident
Any excess between the value of the service and the par/ stated value of the stock is credited to APIC
IFRS Foreign Currency Translation
If Functional Currency = Presentation Currency – Gains / losses on translations are recognized as profit or loss in the period.
If Functional Currency does NOT equal Presentation Currency – translation gains/losses are recorded in OCI.
Notes Receivable Discounting Terms
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Maturity Value = principal and interest at the original terms – amount the bank will receive
Principal + [Principal + Rate+ Time]
Discount Rate – The annual interest rate charged by the bank
Discount Period – the banks waiting period – time between the note’s sale and note’s due date
Discount – fee charged by the bank
Maturity Value X Bank’s Discount Rate x Bank’s Waiting period
Cash to the company
Maturity Value – Bank Discount
Not-for-Profit Organization Net Assets Classifications
There are three classes of net assets:
Permanently Restricted – limited by donor-imposed restrictions that are permanent in nature (e.g. the donor stipulates that the donated assets must be maintained permanently or the asset is expected to provide future benefit to the entity on an on-going basis such as cash, securities, land). Board of director imposed restriction is on assets do not qualify an asset as restricted.
Temporarily restricted net assets – limited by donor imposed restrictions on the timing of use or purpose of use of the donated assets
Unrestricted Net Assets portion of net assets not temporarily or permanently restricted by donors
Tech Co. bought a trademark on Jan 2, two years ago. Tech accounted for the trademark as instructed under the provisions of FASB 142 during the current year. The carrying value at the beginning of the year was $38,000. It was determined that the cash flow will be generated indefinitely at the current level for the trademark.
What amount should Tech Report as amortization expense for the current year?
$0 – Indefinite life intangibles are not amortized. They instead must be tested for impairment each year to determine if their value has been impaired.
FUTURE DEDUCTIBLE AMOUNTS (FDA)
Future Deductible Amounts (FDA) = DTA (Deferred Tax Assets)
DTA = the increases in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year.
Ex: Warranty Claims are accrued on the books but on the TAX REPORT warranty claims are not recorded until actually paid.
FUTURE TAXABLE AMOUNT (FTA)
Future Taxable Amounts (FTA) = DTL (Deferred Tax Liability)
Deferred Tax Liability (DTL) = the increase in Taxes Payable in future years as a result of taxable temporary differences existing at the end of the current year
Ex: SL Depreciation is used on books but taxes use accelerate depreciation.
Stock Subscriptions
- A contractual agreement between a corporation and a buyer, for a certain number of shares at a certain price
- Stock Certificates are issued once the subscription has been paid in full
- Subscriptions NOT paid at year end are a contra-equity account
FUND BALANCE
Fund balance is the difference between the financial assets and any deferred outflows of resources of a governmental fund and the liabilities and deferred inflow of resources of that fund.
Fund Balance is required to be reported in the following five categories
a. Non spendable
b. Restricted
c. Committed
d. Assigned
e. Unassigned Fund Classification
The Financial Reporting Framework for small and medium sized entities has been developed by the:
AICPA
The AICPA found the need to develop a financial reporting framework for smaller privately managed businesses. The framework provides an intuitive and understandable framework that is relevant, simplified, and cost effective
FASB
The Financial Accounting Standards Board is an independent authoritative body, created in 1973 to replace the AICPA Accounting Principles Board, and authorized by the AICPA Code of Professional Conduct as a promulgator of generally accepted accounting principles (GAAP).
The FASB’s main purpose is to establish accounting and reporting standards for large, publicly owned corporations whose share of stocks are traded and registered in the US.
With regards to infrastructure, how should a change from depreciation to the modified approach to be reported?
As a change in accounting ESTIMATE – NOT requiring a restatement of prior periods
According to GASB 1400.107 footnote 9, a change from depreciation to the modified approach should be reported as a change in an accounting estimate and this change would NOT require a restatement of prior periods.
The Rule Making Process of the SEC
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Rulemaking is the process by which federal agencies implement legislation passed by Congress and signed into law by the President.
The SEC outlines the following steps in the rulemaking process:
1) Conceptual Release
2) Rule Proposal
3) Rule Adoption
Research and Development
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FASB ASC 730-10-20 defines research and development as “planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in the developing a new product or services or a new process or technique in process”
Development is the translation of researched findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.
GOODWILL
Good will is to be tested for impairment at the level of the REPORTING unit or at one level below an operating segment.
NOTE: IFRS = CASH GENERATING UNIT (CGU)
Other Comprehensive Bases of Accounting (OCBOA)
Originally referred to as other comprehensive bases of accounting, special framework are alternatives to GAAP reporting. These frameworks include the following:
Cash Basis
Modified Cash Basis
Income Tax Basis
Financial Reporting Framework for small and medium size business
Public business entities framework
NOTE: Basis of Accounting used by an entity to comply with the financial reporting requirements of a lending institution
Retained Earnings
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Retained Earnings / Deficits is adjusted for:
1) Net income or net loss
2) Dividends declared (cash, property, stock)
3) Prior Period Adjustment (PPA)
4) Cumulative Effect of changes in accounting principles
5) Quasi Re-organizations
6) Appropriations
ON which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?
DATE OF GRANT
Both the intrinsic value method and the fair market value method sue the GRANT DATE to measure the cost for stock issued to employees.
At the grant date, one must compute the value for the shares used as compensation, which will be earned and taken as an expense over the service period.
SECURITIES AND EXCHANGE COMMISSION
S – X = Contains info regarding FINANCIAL STATEMENTS that must be submitted
S-K = Contains INSTRUCTIONS for filing non-financial statements / forms required by the SEC
S-T = instructions for electronic filing of required SEC forms.
Current liabilities
A short-term obligation should be excluded from current liabilities IF the entity intends to refinance the obligation on a long term basis and that intent is supported by an ability to consummate the refinancing.
Special Purposes Governments engaged solely in business type activities (such as utilities) only present?
Proprietary Fund (enterprise fund or internal service funds) financial statements.
The DO not present government WIDE statements, Governmental FUND statements or fiduciary fund statements.
The financial statements, that must be presented depends upon the circumstances.
Note that all governments must include M&DA, notes to the financials, and other required supplementary information.
Types of Bonds
Secured - are back by collateral or pledge
Debenture (junk)- are not backed by collateral; risky and pay a high rate of interest
Deep discount bonds (zero interest) are sold at a discount the buyer receives interest paid off at maturity
Callable bonds give the issuer the right to call the bonds before maturity
Income Bonds pay no interest unless the issuer is profitable
Revenue bonds pay interest from specific revenue sources
Types of Bonds
Term bonds mature AFTER a period of time
Convertible bonds can be converted into other securities of the issuer for a period of time after issuance
Commodity-backed bonds (asset-linked) are redeemable in measure of a commodity
Registered bonds are issued in the name of the owner, the certification has to be surrendered when the bond is sold and a new certification has to be issued.
Bearer or coupon bonds are not recorded in the name of the owner can be transferred easily
Fiduciary Funds
Used to account for the resources (and any related liabilities) held by a government entity for the benefit of others (not to support the government’s programs) either in a trustee capacity or as an agent for others.
Fiduciary funds include 1) private-purpose trust fund; 2) investment trust fund 3) Pension Trust Fund 4) Agency Fund
Fiduciary funds use ACCRUAL accounting.
Assuming constant inventory quantities, which of the following inventory costing methods will produce a lower inventory turnover ratio in an inflationary economy?
FIFO (first in, first out)
Inventory turnover is the division of cost of goods sold by average inventory.
In an inflationary period, rising prices will cause LIFO cost of goods sold to be highest (from recent purchases) and LIFO ending inventory to be lowest (earliest purchases).
Quick Ratio
Current Assets - Inventory / Current Liabilities
Measures liquidity of a company and it’s ability to meet their obligations
What item is NOT disclosed in the statement of cash flows when prepared under the direct method either on the face of the statement or on a separate schedule?
A reconciliation of ending retained earnings to net cash flows from operations.
To determine the PV of notes receivable for noninterest or low bearing interest notes you should-
Determine the PV using whichever method is more clearly determinable
Prevailing / Market Rate (if given) OR
Fair Value of the property/ goods/ services exchanged
How should changes in Financial Statements that are in effect, the statements of a different reporting entity be handled?
The Financial Statements of all prior periods should be restated.
FASB ACS 250-10-50-6 provides that accounting changes involving a change in reporting entity should be reported by restating the FS of all prior periods.
Capital Assets are NOT reported in the Governmental Funds - True or False?
TRUE - The general fund (as a governmental fund) is accounted for from the current financial resources perspective. Therefore, capital assets and revaluations of capital assets are not reported.
In the government - wide statements, impairment is a revaluation of a capital assets that is reported as an expense in the statement of activities.
Capital assets are NOT reported in gov’t funds but they are reported in proprietary and fiduciary funds as well as the gov’t wide or entity wide statements.
Lys City records a compensated absence liability as a general gov’t liability. The salary rate used to calculate the liability should normally be the rate in effect:
At the balance sheet date
THere is one exception for cases in which a justifiable lower amt should be used. Example if the amount is based upon a contract.
Preferred Stock
Preferred Stock receives priority over common stock for:
a) dividends and b) liquidating payments
Preferred Stock features include:
a) cumulative / noncumulative
b) participating/ non- participating
Preferred Stock does not usually have voting rights
Cumulative Preferred Stock
any preferred dividend not paid - ACCUMULATES
Must be paid before dividends paid to Common Shareholders
Often called Dividend in Arrears
Must be disclosed in total and on a per share basis
NONCUMULATIVE PREFERRED STOCK
any preferred dividend not paid - DOES NOT ACCUMULATE
Preferred losses - the right to receive unpaid dividends
Operating Segments
Requires that the external revenue of reportable segments must be at least 75% of total consolidated revenue
Significant revenues> 75%
Add other segments until 75% is met
If the total external revenue of the reportable segment is less than 75% of consolidated revenue, additional segments must be added until at least 75% consolidated revenue is included in the reportable segments.
Operating Segments are reported if any one of the three thresholds are met:
Revenue
Asset
Profit or Loss
Remember there is a 10% test
