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
Percentage of Completion must generally be used if:
the company can make the reasonably dependable estimate of the extent of progress towards completion, contract revenues, and contract cost AND
both the buyer and sellers can be expected to satisfy their obligations under the contract.
Change in Acct’g Principal
Change from one generally accepted accounting principle to another generally accepted accounting principle
The retrospective approach is used where the cumulative effect is reported as an adjustment to the beginning of the year retained earnings of the earliest year presented.
The only exception is when FASB issued a new pronouncement.
Lower Cost of Market
At the end of the fiscal year, inventory must be assessed for loss of value
Market value is defined as replacement cost as long as the replacement cost is less than NRV and above NRV minus a normal profit margin
FIFO and Average Cost = measured at the lower of cost and NRV
If NRV of inventory is lower than it cost the difference is recognized as a loss of earning in the period in which it occurs.
The date of declaration
Date on which the Corporations Board formally announces that a dividend will be paid
The debit to Retained Earnings will be recorded on this date - the credit can be Dividends Payable until the date of payment.
Stock Dividends are not legally enforceable until paid therefore no entry is made on the date of declaration.
Comprehensive Income
Starts with NET INCOME
Includes all changes in Equity during a period EXCEPT those resulting from investments by OWNERS
INCLUDE
Unrealized Gains and losses on AFS securities
Translation Gains and Losses on Foreign Currency
Pension Over/ Under Funded Calculation
Gains and Losses on cash flow hedging derivative instruments.
Foreign Currency Translation
At each balance sheet data account, balances must be adjusted to reflect changes in exchange rates during the period since the last BS date
Permanent Differences
Permanent differences are caused by items that:
Enter into pretax financial income but NEVER into taxable income
Enter into TAXABLE income but never into pre-tax income
There are NO deferred tax consequences to be recognized.
Examples: premiums paid on key person life insurance policy, life insurance PROCEEDS collected, interest income from MUNICIPAL bonds are NEVER taxed, dividend received the deduction (Reminder - 80% is NOT taxable), and Corporate Federal Taxes Paid.
Which basis of Accounting is required for a city’s government-wide financial statements?
All data in the government-wide statements are presented on the accrual basis even for governmental activities.
IFRS Lease Criteria
The lease has a FINANCE lease if any of the following exist
TO - Transfer of Ownership
BOP - Bargain purchase option
Term - lease large % of remaining life of the asset
PV of lease payments are equal to substantially all of the FV of the asset
Assets are specialized and can only be used by lessee
Any gains/losses on asset accrue to lessee
Lessee can continue lease at lower than market value rent
Which of the following should normally be considered ongoing or central transactions for a not for profit hospital?
Room and Board Fees
Recovery Room Fees
Both
Both room and board fees and recovery free are revenues from services provided to patients and therefore are ongoing major or central activities of the organization.
IFRS - Revenue Recognition
Revenue Transactions are divided into four categories
Sale of goods
Rendering services
Revenue from interest, royalties, and dividends
Construction contracts - percentage of completion
Cash Method of Determining Taxable Income
Under the cash basis, expenses are deductible only when actually paid with cash.
THere is no current deduction for capital expenditures.
The expense for capital expenditures will be recognized int he form of depreciation, amortization, or depletion.
Fixed assets donated to a governmental unit should be recorded:
Fixed assets donated to a governmental unit should be recorded at ESTIMATED FAIR VALUE WHEN RECEIVED Plus any ancillary charges, if any.
SEC Reporting
Reg S- X = Accounting Rules and Requirement as to the form and content
Reg S - K = instructions for filing nonfinancial statement forms required by SEC.
8-K= Reports Current events
Form 3 - A Statement of Beneficial ownership for corporate insiders
Temporary Differences
Future Taxable Amount = DT Liabililty
Future Deductible Amount = DT Asset
Imposed Non-Exchange Revenue
Non-Exchange Revenues are separated into four categories: derived tax revenues, imposed non-exchange revenues, government-mandated non-exchange transactions, and voluntary non-exchange transactions.
Property tax is imposed nonexchange revenue because they are levied or imposed by governments.
Income and sales taxes are derived tax revenues as they are assessments imposed on exchange transactions.
Bond Interest Terms
If issued at par - Stated or Face Value = Market Rate
If issued below par - RECORD at discount
Stated Rate < Effective Rate
Bond rate is worse than market
If issued above part - RECORD premium
Stated Rate > Effective Rate
Bond Rate is better than Market Rate
Common Stock holder Rights
Considered basic ownership of a corporation, with control over management
Rights include: voting, share in the corporation earnings, share in liquidating of corporate asset, after creditors and preferred stockholder claims
EPS Formula
Net Income - Current Preferred Dividends / Weighted Average Common shared outstanding
Preferred Dividends - back out the current preferred dividend whether paid, declared or accumulated
When preferred dividends are cumulative, back out dividend whether declared or not
Use basic EPS when a company has simple capital structure
If a company has potentially dilutive securities, a company has complex capital structure, must show basic EPS and Diluted EPS.
which of the following conditions must exist in order for an impairment to be recognized?
1) Carrying Value of the asset is LESS than Fair Value
2) Carrying Value of the asset is NOT recoverable
II only.
If the undiscounted sum of estimated future cash flows for an asset or asset group is less than the asset or asset group’s book value, an impairment loss may need to be recognized.
The actual impairment loss is the difference between the BV and FV of the assets.
NOTE: there is NOT an impairment loss if the FV EXCEEDS the Carrying Value (CV)
International Accounting Standards Board
Independent, not for profit private sector organization working in the public interest.
Objectives:
1) develop single-set of high quality globally accepted IFRS
2) Promote the use and application of those standards
3) take account of the financial reporting needs of emerging economies and small and medium-sized entities (SME’s)
4) bring about the convergence of national accounting standards and IFRS to high-quality solutions
If determining the actual historical cost of general infrastructure assets is NOT practical because of inadequate records, public institutions that report as special purpose governments either engaged only in governmental activities or engaged in both governmental and business-type activities should report major infrastructure assets using
ESTIMATED HISTORICAL COST.
Liquidating Dividends
The liquidating dividend is that portion of the cash dividend that EXCEEDS the balance in retained earnings because other equity accounts must be debited.
Example: Total amount of Cash Dividend =$400
LESS Retained Earnings = $300
Liquidating Dividend $100
Keep in mind, Liquidating dividend are a return OF the investment rather than a return ON the investment.
Concerning disclosure of reverse repurchase and fixed coupon reverse repurchase agreements - how should the underlying securities be reported.
They should be reported as investments!
They should NOT be netted on the balances.
They should be reported as a fund liability captioned ‘obligations under reverse repurchase agreements’ and the underlying securities called investments.
Interest cost should NOT be netted with interest earned on related investments.
Credit risks need to be disclosed.
Governmental Fund Balance Sheet Presentation
The balance sheet includes a separate column for each major governmental fund and a column with
aggregated information for all other governmental funds and a total column for all governmental funds
Governmental Funds are NOT reported by FUND type.
When purchasing a bond, the present value of the bond’s expected net future cash inflows discounted at the market rate of interest provides what information about the bond?
PRICE.
The bond has a face amount of principal that will be repaid to the owner at the end of the term.
The bond coupon rate when multiplied by the face amount or principal = the actual amount of cash interest paid to the bonder owner annually.
The present values of these two rights is the value of the bond = rational for the price.
During periods of rising prices,when the FIFO inventory method is used, a perpetual inventory system results in ending inventory cost that is:
the same as the periodic system.
FIFO perpetual inventory will produce the same results as the periodic method.
This is due to the fact that the FIRST IN units are removed under both methods.
This is not true for any other inventory method other than specific identification.
Which of the following would be reported as an INVESTING activity in a company’s cash flow?
Collection of proceeds from a note payable
Collection of a note receivable from a related party
Collection of an overdue AR from customer
Collection of a tax refund from the gov’t
Collection of a note receivable from a related party
Investing activities involve asset transactions other than those related to operating results (e.g. accounts receivable from sales and taxes)
Software Cost
Software to be sold, leased, or licensed
Expense until reach technological feasibility (such as prelim stage and cost for training and maintenance) then CAPITALIZE cost (material, labor, capitalized interest) related to development - coding, hardware installation, testing
Amortize capitalized cost on a straight-line basis.
Corporations issuing stock should charge Retained Earnings for the market value of the shares issued in
An Employee Stock Bonus
A purchase of a Subsidiary
a 10% Stock Dividend
a 2 for 1 spilt
10% Stock Dividend
FASB ASC 505- 20-30-3 provides that for issuance of additional shares less than 20 or 25% the issuing corporation should transfer from earned surplus.
Fair value of new shares issued is transferred
–> from retained earnings to capital stock and additional paid-in capital
A town basic financial statements include information for major and non major gov’t funds. There were no internal service or enterprise funds. One of the non major funds is the ROAD TAX FUND, which accounts for a share of the tax monies remitted by the state on a prorated basis. Individuals fund statements with prior year comparative dat would have to be presented if
a state law requires prior year comparative data for any individual fund receiving a prorated share of the state tax collection.
Because the focus of fund financial reporting is on MAJOR FUNDS, non major funds aggregated and not shown separately.
Proprietary FUNDS
The economic resources measurement focus and the accrual basis of accounting are used for proprietary funds and fiduciary funds.
Proprietary funds consists of enterprise and internal service funds.
Governmental FUNDS
The current financial resources measurement focus and the MODIFIED accrual basis of accounting are used for governmental funds.
The general fund, capital project funds, special revenue funds, and debt service fund are all governmental funds.
How are discontinued operations that occur at mid-year initially reported?
Included in net income and disclosed in the notes to the interim financial statements
Discontinued operations should be reported separately, NET OF TAX, on the income statement for the interim period. Disclosure in the notes to the interim statements is required.
The FASB guidance on accounting for investments of NOT FOR PROFITS provide that -
1) investments in debt securities are reported at market value
2) Investments in equity securities with readily determined market values are reported at market value
3) Other investments may be reported at cost or the lower of cost or market
4) Investment gains and losses are reported as changes in unrestricted net assets unless their use is temporarily or permanently restricted by explicit donor stipulations or by law.
Notes OR accounts receivables from officers, employees or affiliated entities must be
shown separately and not included under a general heading such as notes receivable or accounts receivable.
How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate by reported?
As a change in accounting estimate which is handled PROSPECTIVELY. So, this item would be considered a component of income from continuing operations.
It is part of income from continuing operations because no special disclosure is required on the face of the income statement.
River City has a defined contribution PENSION plan How should it be reported on the financial statements?
Amortize any transition assets over the estimated number of years of current employee’s service.
Disclosure of pension benefit obligations as well as the requirement to accrue all earned benefits relate to defined contribution plans.
Consolidations Require - YE reciprocal accounts to be eliminated
A / R and A / P
N / R and N / P
Adv to Sub or Adv from Parent
all must be eliminated
Ex: Parent Liabilities = 450 + Sub liabilities + 200 - Intra -100= 550
Bank Reconciliation
Balance per the books \+ NR Collected by the Bank \+ INcome Interest -Bank Service Charge -NSF \+ / - ERROR
Bank
+ Deposit in Transit
- O/S Checks
Voluntary Changes in Accounting Principal (ex: changing inventory methods)
RETROSPECTIVE APPROACH - a cumulative effect is reported as an adjustment to the beginning of the year retained earnings in the earliest year presented.
Appropriate Retained Earnings
Have been set aside by the Board of Directors for specific use
Intent is to isolate from payment to shareholders for a variety of reasons such as acquisition of land or buildings or reserve for legal settlement
Statement of Revenue, Expenditures, and Changes in FUND Balances
Is presented by MAJOR fund
The excess of revenue over or under expenditures is a REQUIRED subtotal
All transfers are reported as Other Financing Sources and use
Special items and extraordinary items are reported as Other Financing Sources and use
Fund Balances
Fund balance classificiations
1 nonspendable
2 restricted - externally by creditors or by law
3 committed - by formal action of government
4 assigned - contraint by the government’s intent to be used for a specific reason
5 unassigned
Operating Segments
Required Disclosures 1 Assets by segment 2 Sales by Segment 3 Results of operation by segment 4 Reconciliation to the results of the operations for the entire enterprise.
Liability or cash flow by segment is not required
The combining fund statements are
part of the Comprehensive Financial Report but no part of the basic financial statements
The basic financial statements fund financial statements for government and proprietary fund focusing on major funds with nonmajor fund information aggregated or combined.
Disclosure Principal
Certain info may be presented on either the face of the financial statements or in the notes to the financial statements.
Disclosure int he notes to the financial statements is needed only when the information required to be disclosed is NOT displayed on the face of the financials
Note disclosure includes essential information not supplemental.
In a compensatory stock option plan for which the grant, vesting, and exercise dates are all different, the additional paid-in capital - stock option accounts should be reduced at what date?
The exercise date.
Total compensation is determined at the date of the grant, based on the FV of the award date. The total compensation cost is recognized over the service period by recording the following
Compensation Exp
APIC Stock Options
Statement of Cash Flows
Operating Activities - generally include transactions that enter into the determination of net income
Investing activities - all transactions related to the making or collecting of loans and the acquiring and disposing of debt, equity, or PPE
Financing - all transactions related to obtaining resources from owners and providing them w/ a return on their investment and repaying debt.
Three classifications of freestanding financial instruments
Mandatorily redeemable financial instruments
Obligations to repurchase the issuer’s equity shares by transferring assets
Certain obligations to issue a variable number of shares
These three classes of financial instruments MUST be presented in the balance sheet as liabilities.
They may NOT be presented between the liability sections and the equity section.
Contribution Receivables
Contribution Receivables for UNCONDITIONAL contributions are reported at PRESENT VALUE of the expected cash flows EXCEPT those to be collected within 1 year which may be recorded at NET REALIZABLE VALUE.
Conditional promises should not be record until the conditions are met.
Contributions conditioned upon a certain event, should be recorded as a refundable advance.
If a computer software arrangement has an agreement to deliver software that requires significant production, modification, or customization of software, what method of accounting should be used to recognize the revenue from the contract?
Contract Accounting - the percentage of completion.
Software Cost
The annual amortization of capitalized software cost is the GREATER of:
Ratio of current revenue to current and FUTURE revenues
The straight line method over the remaining useful life of the software
*Once technological feasibility has been established, all cost are capitalized and reported at the LOWER of unamortized cost or NRV
Revenue, Expenses, Gains, losses net income or loss, and OCI are reported on the consolidated financial statements at the consolidated amounts, which include the amounts attributed to the owners of the parents and the NCI - True or False?
TRUE -
The amount of the consolidated net income attributed to the parent and to the NCI must be clearly identified and presented on the face of the consolidated income statement.
The replacement cost of an inventory item is below the NRV and above the NRV less a normal profit margin. The inventory items’ original cost is above the NRV. Under the lower cost or market method, the inventory item should be valued at:
REPLACEMENT COST
Market Value = Replacement cost as long as RC is less than NRV and above NRV - Less Profit Margin
NOTE:
FIFO and Avg. Cost Measured Lower-of-Cost-or-Net Realizable Value
Lifo or Retail Inventory Lower-of-Cost-or-Market
Under the deferred method of accounting for deferred income taxes, a credit balance int he deferred income taxes account that appears on the balance sheet
Does not represent a payable in the usual sense of the term payable. but instead results from temporary differences between the amount of income or expenses reported for tax purposes.
Form 10-Q
Required Quarterly Report
Includes Unaudited Financial Statements
Must present the most recent quarter end balance sheet and the balance sheet for the end of the preceding fiscal year.
Required Financial Statements Fund Financial Statements
The required financial Statements required fund financial statements include
Fund Balance Sheet
Statement of Revenue, Expenditures and changes in fund balances
General Fund and major special revenue fund statement of revenues expenditures and changes in fund balance - budget to actual
The budget comparisons may be presented as part of the required supplementary material.
Long Term Note Receivable
LT N/R are recorded at PV
Interest-bearing = Face Amount of NR - PV
Assume Interest Rate Provided = Prevailing Rate
*only discount if more than 1 year if less than 1 yr record at FACE AMOUNT
IRFS Foreign Currency
Functional currency - primary economic environment in which the entity operates
Foreign: Currency other than functional
Presentation currency in which the financial statements are presented
IF Functional = Presentational - Gains/Losses = IC statement
If Functional is NOT = Presentational - Gains/Losses are recorded in OCI
The components of the lease receivable for a lessor involved in a direct financing lease
Minimum Lease Payments + Unguaranteed residual value accruing to the benefit of the lessor
When collection of sales price is NOT reasonably assured and revenue recognition is deferred - use
Installment Sales Method - Revenue recognized as collections are made
Cost Recovery Method no profit is recognized on sale UNTIL all cost have been recovered
Required FS for nongovernmental VHMO and ONFPO include:
Statement of Financial Position (Bal Sht)
Statement of Activities (Inc. Statement)
Statement of Cash Flows
Statement of Functional Expense (Required for VHWO - VOLUNTARY for ONFPO)
A note receivable bearing a reasonable interest rate is sold to a bank with recourse. At the date of the discounting transaction, the notes receivable discounted account should be:
INCREASED BY THE FACE AMOUNT OF THE NOTE
A contingent Liability exist therefore the notes receivable discounted account must be INCREASED by the face amount of the note.
Governmental accounting - Statement of Cash Flows
Presented for PROPRIETARY FUNDS and GOVERNMENTAL Entities engaged in business type activities.
ONFP FS
Statement of Cash Flows
Operating
- Cash Revenues less cash expenses
- Unrestricted Contributions/Pledges
- Unrestricted interest/dividends received
Investing
- Buy or sell investment
- PPE
- Buy or sell works of Art
Financing
- Borrow or pay debt principal
- Contributions restricted for LT purposes
- Interest/ Dividends restricted for LT purposes
FASB ACS 480 10 25 14 requires this type of obligation must be considered a liability if any one of the conditions is true.
A Fixed Monetary Amount Known at inception
Variations in something other than the FV of the issuers equity share
Variations inversely related to changes in the FV of the issuer’s equity share
Young & Jamison’s modified cash-basis financial statements indicate cash paid for operating expenses of $150,000, end-of-year prepaid expenses of $15,000, and accrued liabilities of $25,000. At the beginning of the year, Young & Jamison had prepaid expenses of $10,000, while accrued liabilities were $5,000. If cash paid for operating expenses is converted to accrual-basis operating expenses, what would be the amount of operating expenses?
In converting expenses from a cash basis to an accrual basis, a prepaid expense increase of $5,000 must be deducted because it is an expense on a cash basis and an asset on an accrual basis. An increase of $20,000 in accrued liabilities must be added because it is an expense incurred but not paid.
$150,000 - $5,000 + $20,000 = $165,000
The FASB has jurisdiction over entities with which of the following characteristics?
Body corporate and politic
Exempt from federal taxation
Body corporate and politic or exempt from federal taxation
Power to enact and enforce a tax levy
Exempt from federal taxation.
corporate bodies and politic and entities with the power to enact and enforce a tax levy are governments.
Not-for-profit organizations that are not governmental are exempt from federal taxation.
