CPA FAR - Financial Statements Flashcards
Cash Basis VS Accrual Basis
Neither Method will include contribution From Owner they are not considered Income from operations
Under Cash Basis Accounting Accruals are not recognize only the movement of cash is recognize.
Under Accrual Basis Income recognizes all accruals and movements of cash other than cash invested by owner or distributed to owner
What is the order of Current Assets?
Current assets include, in descending order of liquidity,
(1) cash and cash equivalents;
(2) certain individual trading, available-for-sale, and held-to-maturity debt securities;
(3) receivables;
(4) inventories;
(5) prepaid expenses
(6) certain individual investments in equity securities. Trading debt securities are expected to be sold in the near term, so they are likely to be classified as current.
How do you classify Current liabilities?
The following are current liabilities:
(1) Obligations that, by their terms, are or will be due on demand within 1 year (or the operating cycle if longer) and
(2) obligations that are or will be callable by the creditor within 1 year because of a violation of a debt covenant. Deferred tax assets and liabilities are classified as noncurrent.
How to classify as current liabilities
Accounts payable are properly classified as current liabilities because they are for items entering into the operating cycle. Short-term debt that is refinanced by a post-balance-sheet-date issuance of long-term debt should be classified as noncurrent. (The ability to refinance on a long-term basis has been demonstrated.) Thus, the short-term construction loan is classified as noncurrent.
Reporting Liabilities
If an entity intends to refinance short-term obligations on a long-term basis and demonstrates an ability to consummate the refinancing, the obligation should be excluded from current liabilities and reclassified as noncurrent. The ability to consummate the refinancing may be demonstrated by a post-balance-sheet-date issuance of long-term obligations or equity securities. Thus, the 16% note payable should be classified as noncurrent. The ability to refinance may also be shown by entering into a financing agreement that meets the following criteria: (1) the agreement does not expire within the longer of 1 year or the operating cycle, (2) it is noncancelable by the lender, (3) no violation of the agreement exists at the balance sheet date, and (4) the lender is financially capable of honoring the agreement. For this reason, the 14% note payable is also excluded from short-term obligations. The amount of the notes payable classified as short-term is therefore $0.
An entity may intend to refinance short-term obligations on a long-term basis. If it demonstrates an ability to consummate the refinancing, the obligation is excluded from current liabilities and classified as noncurrent. The ability to consummate the refinancing may be demonstrated by a post-balance-sheet-date issuance of a long-term obligation or equity securities prior to issuance of the balance sheet. It also may be demonstrated by a financing agreement prior to issuance of the balance sheet that meets the following criteria: (1) The agreement does not expire within the longer of 1 year or the operating cycle, (2) it is noncancelable by the lender, (3) no violation of the agreement exists at the balance sheet date, and (4) the lender is financially capable of honoring the agreement. Thus, because the lender is not expected to be financially capable of honoring the agreement, the note must be classified as current.
Multi Step Income statement (Order)
Sales - Cost of Goods Sold = Gross Income - Selling, General & Administrative - Depreciation = Operating Income \+/- Misc. Revenue/ Gains / Expense/ Losses (Interest Income, Misc. Expense) = Income before taxes - Income Tax Expense = Income from continuing operations \+/- Income from discontinued operations = Net Income
Other comprehensive income (OCI)
If an entity that reports a full set of financial statements has items of other comprehensive income (OCI), it must report comprehensive income in one continuous statement or in two separate but consecutive statements. One continuous statement has two sections: net income and OCI. It must include (1) a total of net income with its components, (2) a total of OCI with its components, and (3) a total of comprehensive income. In separate but consecutive statements, the first statement (the income statement) must present the components of net income and total net income. The second statement (the statement of OCI) must be presented immediately after the first. It presents (1) the components of OCI, (2) the total of OCI, and (3) a total for comprehensive income. The entity must begin the second statement with net income.
If an entity has no items of OCI for any period presented, it need not report OCI or comprehensive income. Otherwise, it must report comprehensive income either (1) in one continuous statement of comprehensive income (with sections for net income and OCI) or (2) in two separate but consecutive statements (a statement of net income and a statement of OCI).
comprehensive basis of accounting other than generally accepted accounting principles
A comprehensive basis of accounting other than GAAP may be (1) a basis that the reporting entity uses to comply with the requirements or financial reporting provisions of a regulatory agency; (2) a basis used for tax purposes; (3) the cash basis, and modifications of the cash basis having substantial support, such as recording depreciation on fixed assets or accruing income taxes; or (4) a definite set of criteria having substantial support that is applied to all material items, for example, the price-level basis. However, a basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution does not qualify as governmentally mandated or as having substantial support.
