CPA Studies Flashcards
1
Q
What does TID stand for in the GAAS general standards?
A
Training, Independence, and Due professional care
2
Q
What does PIE stand for in the standards of field work?
A
Planning and supervision, Internal Control, and Evidence
3
Q
What does GCDO stand for in the standards of reporting?
A
GAAP, Consistency, Disclosure, and Opinion
4
Q
When is an adverse opinion rendered?
A
When a severe GAAP departure is present in the financial statements.
5
Q
What are the two main differences between the standards of attestation and the auditing standards?
A
The attestation standards and generally accepted auditing standards differ conceptually in two main areas: 1) the attestation standards provide a framework for the attest function beyond historical financial statements; and 2) the attestation standards provide for the growing number of attest services in which the practitioner expresses assurances in forms other than the positive opinion.
6
Q
Formula for days sales in acc receivable?
A
Acc rec / credit sales per day.Credit sales per day = Total credit sales / 365.
7
Q
Adj entry for wages at end of year that weren’t recorded:
A
DR: Operating expensesCR: Accrued wages payable(accrued liab)
8
Q
Why would an auditor modify the auditor’s report based on the work of a specialist?
A
If there is a difference between the specialist’s valuation of an asset and the client’s.
9
Q
who should make up the audit committee?
A
members of the board or directors who are not officers or employees
10
Q
what are the 3 general standards?
A
adequete training, independence of mental attitude, and due professional care
11
Q
3 fieldwork standards?
A
adequete planning, understanding the entity and its internal control, sufficient and appropriate audit evidence
12
Q
the auditors judgment of the overall fairness of the financial statements is applied within the framework of?
A
generally accepted audit principles
13
Q
what does the auditor primarily use to come up with materiality?
A
the prior year financial statements
14
Q
basics of independence concerning a close relative?
A
CR can have a financial interest in the audit client as long as the amount is immaterial to them. CR can work for the audit client as long as its not in accounting or financial reporting. CR can work for audit firm, and is not a covered member unless the person works on the engagement team or can influence the members of the engagement team or the audit itself
15
Q
when planning a new audit, why would the auditor consider the methods used to process accounting information?
A
Because the methods influence the design of internal control
16
Q
who appoints the PCAOB?
A
SOX created the PCAOB and it is overseen by the SEC
17
Q
under securities act of 1934 what organizations are required to submit audited financial statements?
A
every company traded on national and over the counter exchanges
18
Q
primary purpose of establishing quality control procedures for deciding whether to accept a new client?
A
minimize likelihood of association with clients whose management lack integrity
19
Q
to succeed in legal action against the auditor, the client must be able to show that?
A
the CPA had duty to perform, the CPA breached the contract, the client suffered losses, and that there is a close causal connection between the auditor’s behavior and the damages suffered by the client
20
Q
detection risk?
A
risk that auditor concludes no material misstatement exists when there actually is one
21
Q
3 components of audit risk?
A
inherent risk, control risk, detection risk. They are multiplied together: .8 x .75 x .25 = .15 audit risk
22
Q
if inherent risk is .8 and control risk is .2, what does the auditor do to lower audit risk?
A
increase and perform substantive testing to reduce detection risk to the point that it equals the acceptable level of audit risk
23
Q
why are inherent risk and control risk different than detection risk?
A
inherent risk is the possibility of a material mistatement due to lack of human and system technology. Control risk is risk of material error that is not prevented or detected on a timely basis by the client’s internal controls. Detection risk is risk that the auditor misses a material error. Thus, inherent risk and control risk are functions of the client and its environment while detection risk is not
24
Q
the risk of material misstatement refers to:
A
the combination of inherent & control risk. Multiplying IR by CR results in the ‘risk of material misstatement’
25
the level of detection risk is inversely related to:
the assurance provided by substantive tests. As the auditor performs substantive procedures he becomes more and more sure there are no material errors exist, and detection risk goes down
26
the audit program should be designed so that sufficient evidence is gathered to:
support the auditor's conclusions
27
Do most illegal acts affect the fin statements directly or indirectly?
indirectly.
28
if you uncover an illegal act at a public company, the auditor is required to notify:
the SEC
29
when auditor has reason to believe an illegal act has ocurred, he should do what?
consider accumulating additional evidence, inquire of management at a level above those who did the act, and consult with the client's legal counsel
30
what is lapping fraud?
you steal customer A's money, then you get customer B's money and apply it to A's account, then get C's money and apply it to B's account, and so on
31
what is kiting?
money is moved from one account to the other but in different time periods to inflate the amount being reported
32
does the PCAOB make auditing standards that must be followed by all CPAs?
it only makes auditing standards for public companies
33
is the PCAOB a gov agency?
no
34
what is an S-1 form?
a form that must be filed with the SEC whenever a company plans to issue new securities to the public
35
what is auditors responsibility for supplementary information such as segment info?
auditor should apply limited procedures to the required info and report deficiencies in or omission of such info
36
who creates auditing standards for private companies?
the AICPA
37
what is form 8-K?
the form filed with SEC to report a significant event
38
how long do you have to dispose of stock in a client if you inherited some unsolicited?
30 days
39
do operating leases and claims against clients for immaterial amounts impair indedpence?
no
40
are statements in the standards that include the word "should" mandatory?
they are considered presumptively mandatory- the auditor can depart from them if justification is documented
41
what is the completeness assertion concerned with?
determining that all transactions are recorded
42
in testing the existence assertion for an asset, the auditor normally works from the ______ to the \_\_\_\_\_\_\_
accounting records to the supporting evidence
43
according to SOX how long does a firm keep audit documentation?
have to keep it 7 years
44
what is the best place to put in writing the understanding between client and firm about what will take place during the audit?
the engagement letter
45
to see if checks are being issued for unauthorized purchases, the auditor would most likely select testing from the population of:
canceled checks
46
what does tracing shipping docs to sales invoices accomplish?
that all items shipments have been invoiced
47
most effective control over recorded purchases?
supporting forms such as purchases orders and receiving reports are independently compared for agreement
48
if trying to detect overstatement of sales, you start with the:
accounting records and trace to the source documents
49
what is pervasiveness?
the extent to which an exception affects different parts of the financial statements
50
difference between adverse opinion and disclaimer of opinion?
adverse opinion is stating that the financials do not fairly present the position of company in accordance to GAAP. Disclaimer of opinion is when a material uncertainty affects the financials
51
what paragraph explicitly states the auditors responsibility to express an opinion?
the opening paragraph of the standard audit report
52
when would a lack of independence cause a disclaimer of opinion?
in all cases
53
if the financials and/or footnotes fail to disclose information that is required by GAAP, what type of opinion is issued?
adverse or qualified. if qualified, an extra paragraph would be added that describes the nature of the missing info, and the opinion paragraph would have an extra sentence "except for the information discussed in previous paragraph"
54
on a public company audit, are the reports on the financial statements and internal controls issued separately or combined?
it can be either
55
what are the 2 situations which result in a qualified opinion?
1) when the statements are materially misstated due to one account balance or class of transaction that does not have a pervasive effect on the statements2)when the auditor is unable to obtain audit evidence regarding a particular account balance that does not pervasively affect the statementsEssentially either a single deviation from GAAP or a scope limitation. The report itself is very similar to an unqualified opinion but an extra paragraph is added to explain the qualification after the scope paragraph but before the opinion paragraph
56
how many paragraphs does a standard unqualified report have and what are they?
3. The introductory paragraph states the audit work performed and states the responsibility of the auditor and auditee in relation to the financial statements, the scope paragraph details the scope of the audit work, and the opinion paragraph simply states the unqualified opinion
57
when is an adverse opinion issued and how does the report change?
Adverse is the opposite of an unqualified opinion. It means that the financial statements as a whole are materially misstated and do not conform with GAAP. or the "differ pervasively" from GAAP. On the report, the scope paragraph is modified accordingly and an explanatory paragraph is added after the scope paragraph but before the opinion paragraph. In the opinion paragraph, the auditor specifically states that the statements are not in accordance with GAAP.
58
What situations would result in a disclaimer of opinion?
When the auditor is not independent or there is a conflict of interest.When a limitation on scope is imposed by the client and the auditor cant gather sufficient audit evidence.When there is a substantial going concern issue.When there are significant uncertainties in the business of the client.
59
when an auditor selects one or a few transactions and follows them through the entire accounting process, he is doing what?
a walkthrough. A walkthrough combines observation, documentation, and inquiry. PCAOB Standard 2 requires at least one walkthrough per major class of transaction
60
which section of SOX requires mgmt to issue an internal control report?
Section 404 requires auditors to assess and report on the effectiveness of the internal control over financial reporting
61
what is the definition of incompatible functions?
those that place any person in a position to both perpetrate and conceal errors or irregularities in the normal course of their duties. well designed controls should separate the duties of authorization, record keeping and custody of assets
62
what is the primary purpose of the auditors consideration of internal controls?
to determine the nature, extent, and timing of audit tests to be applied
63
if the auditor finds a reportable condition in internal controls, who should they tell first?
the audit commitee
64
if after understanding the ICs the auditor decides to perform tests of controls, the auditor most likely decided that:
it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests
65
what is the concept of reasonable assurance?
recognizes that the cost of internal controls should not exceed the benefits derived
66
7 factors of the control environment: (I see ham bone)
I- integrity and ethical valuesC- commitment to competenceH- human resource policies and practicesA- assignment of authority and responsibilityM- management's philosophy and operating styleB- board of directors or audit committee participationO- organization
67
even the best designed IC can fail due to:
human error, faulty judgement, collusion, management override
68
what are the five components of internal control? (clowns run cartels in mexico)
1) control environment2) risk assessment3) control activities4) information and communication5) monitoring
69
\*\*\*What is the process of assessing risk in general?
You assess inherent risk and control risk to determine the amount of substantive testing that must be carried out to reduce detection risk to a level so that overall risk will still achieve an acceptably low level. Acceptable audit risk is not changed.
70
what is the audit risk formula?
inherent risk X control risk X detection risk = overall audit risk
71
the auditor uses the assessed level of control risk to determine the acceptable level of
detection risk for financial statement assertions
72
if auditor increases the level of control risk because controls are found to be ineffective, the auditor would most likely increase the
extent of tests of details
73
what do assertions about existence or occurrence deal with?
whether assets or liabilities exist at a given date and whether recorded transactions have occurred during a given period
74
when an auditor assesses control risk as low, he must:
identify specific policies and procedures that are likely to prevent or detect material misstatements, and he must perform tests of controls to evaluate the effectiveness of such policies and procedures. if the tests of controls result in the control risk being assessed as low, then the auditor may limit the extent of substantive testing
75
what does 'information and communication' refer to as far as internal control within an organization?
the ability of the accounting system to generate reliable info and convey it in a timely manner to the parties in the organization that need it
76
What are the 5 assertions about classes of transactions and events for the period?Alistair Overeem Cant Cut Corners
Accuracy- amounts and other data have been recorded appropriatelyOccurrence- transactions and events that have been recorded have occurredCompleteness- all transactions and events that should have been recorded have been recordedCutoff- transactions and events have been recorded in the correct accounting periodClassification- transactions and events have been recorded in the proper accounts
77
4 assertions about account balances at end of period?Even Cain Realizes Value
Existence- assets, liabilities, and equity interests existCompleteness- all assets, liabilities, and equity that should have been recorded have been recordedrights and obligations- the entity holds or controls the rights to assets, and liabilities are the obligations of the entityValuation and allocation- assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
78
4 assertions about presentation and disclosure:Overeem Can't Complain Anymore
Occurrence & rights and obligations- disclosed events and transactions have occurred and pertain to the entityCompleteness- all disclosures that should have been included have been includedClassification and understandability- financial information is appropriately presented, described, and clearly expressedAccuracy and valuation- financial and other info are disclosed fairly and at appropriate amounts
79
why is it best to have "blind" invoices received by the receiving department?
to make sure the receiving dep counts the incoming merchandise so that they only pay for what they received
80
what is the purpose of purchase cutoff testing?
to determine that items actually received in inventory have been included in the proper period
81
what is an integrated test facility?
it puts fake transactions in with real transactions which are processed together without client employees knowing it
82
a person who mails signed checks can also:
cancel the supporting documents
83
an effective control over purchases would be to have the purchasing department authorized to:
purchase, but not initiate purchases
84
an increased extent of tests of controls is most likely to occur when:
controls appear to be effective so that the preliminary control risk assessment is low. this is because auditor can then do less substantive testing.
85
are significant deficiencies and material weaknesses supposed to be relayed orally or written to those charged with governance?
AU 325 says that sig def and material weaknesses in a public company must be communicated in writing to the audit committee of the board of directors
86
when should control deficiencies be reported?
either during the audit or after the audit's completion, within 60 days of the report release date
87
management must disclose material weaknesses in internal control if the weakness exists:
at the end of the year
88
what are the 2 types of control deficiency?
design and operations. design means its poorly designed, while operations means the people performing their tasks are doing them deficiently
89
what is ratio estimation used for?
to measure the total estimated error amount within a population
90
there is an inverse relationship between sample size and:
tolerable error. as the tolerable error decreases the sample size would increase
91
what is sampling risk?
the risk that the sample chosen doesn't accurately represent the population
92
How is the allowance for sampling risk calculated?
It's the difference between the upper limit and the deviation rate of the sample.
93
what are embedded audit modules?
coded into the clients system to collect data for the auditor
94
purpose of test data approach?
test data is entered with a known outcome into client's system to see if it produces same result
95
under the PCAOB standards, a scope limitation related to internal controls over financial reporting should result in:
a disclaimer of opinion.
96
if a control deficiency is discovered, what is the next step?
determine if it is a material weakness by gathering additional evidence
97
what opinion is rendered if there is one or more material weakness in internal control over fin reporting?
an adverse opinion
98
"if this statement is not correct... give details of difference directly to our auditors
acc rec confirmation
99
"in our opinion, these statements audited by us comply in all material respects"
comfort letter to underwriters
100
"no claims that OUR lawyer..."
management rep letter
101
"which raises substantial doubt about its ability to continue as a going concrern"
auditors report
102
CPA is associated with the financial statements, but is NOT independent
Compilation report
103
providing NEGATIVE assurance on a company's financials
review report
104
material departure from GAAP but NOT materially misstated
qualified report for GAAP departure
105
What does TID stand for in the GAAS general standards?
Training, Independence, and Due professional care
106
What does PIE stand for in the standards of field work?
Planning and supervision, Internal Control, and Evidence
107
What does GCDO stand for in the standards of reporting?
GAAP, Consistency, Disclosure, and Opinion
108
When is an adverse opinion rendered?
When a severe GAAP departure is present in the financial statements.
109
What are the two main differences between the standards of attestation and the auditing standards?
The attestation standards and generally accepted auditing standards differ conceptually in two main areas: 1) the attestation standards provide a framework for the attest function beyond historical financial statements; and 2) the attestation standards provide for the growing number of attest services in which the practitioner expresses assurances in forms other than the positive opinion.
110
Formula for days sales in acc receivable?
Acc rec / credit sales per day.Credit sales per day = Total credit sales / 365.
111
Adj entry for wages at end of year that weren't recorded:
DR: Operating expensesCR: Accrued wages payable(accrued liab)
112
Why would an auditor modify the auditor's report based on the work of a specialist?
If there is a difference between the specialist's valuation of an asset and the client's.
113
who should make up the audit committee?
members of the board or directors who are not officers or employees
114
what are the 3 general standards?
adequete training, independence of mental attitude, and due professional care
115
3 fieldwork standards?
adequete planning, understanding the entity and its internal control, sufficient and appropriate audit evidence
116
the auditors judgment of the overall fairness of the financial statements is applied within the framework of?
generally accepted audit principles
117
what does the auditor primarily use to come up with materiality?
the prior year financial statements
118
basics of independence concerning a close relative?
CR can have a financial interest in the audit client as long as the amount is immaterial to them. CR can work for the audit client as long as its not in accounting or financial reporting. CR can work for audit firm, and is not a covered member unless the person works on the engagement team or can influence the members of the engagement team or the audit itself
119
when planning a new audit, why would the auditor consider the methods used to process accounting information?
Because the methods influence the design of internal control
120
who appoints the PCAOB?
SOX created the PCAOB and it is overseen by the SEC
121
under securities act of 1934 what organizations are required to submit audited financial statements?
every company traded on national and over the counter exchanges
122
primary purpose of establishing quality control procedures for deciding whether to accept a new client?
minimize likelihood of association with clients whose management lack integrity
123
to succeed in legal action against the auditor, the client must be able to show that?
the CPA had duty to perform, the CPA breached the contract, the client suffered losses, and that there is a close causal connection between the auditor's behavior and the damages suffered by the client
124
detection risk?
risk that auditor concludes no material misstatement exists when there actually is one
125
3 components of audit risk?
inherent risk, control risk, detection risk. They are multiplied together: .8 x .75 x .25 = .15 audit risk
126
if inherent risk is .8 and control risk is .2, what does the auditor do to lower audit risk?
increase and perform substantive testing to reduce detection risk to the point that it equals the acceptable level of audit risk
127
why are inherent risk and control risk different than detection risk?
inherent risk is the possibility of a material mistatement due to lack of human and system technology. Control risk is risk of material error that is not prevented or detected on a timely basis by the client's internal controls. Detection risk is risk that the auditor misses a material error. Thus, inherent risk and control risk are functions of the client and its environment while detection risk is not
128
the risk of material misstatement refers to:
the combination of inherent & control risk. Multiplying IR by CR results in the 'risk of material misstatement'
129
the level of detection risk is inversely related to:
the assurance provided by substantive tests. As the auditor performs substantive procedures he becomes more and more sure there are no material errors exist, and detection risk goes down
130
the audit program should be designed so that sufficient evidence is gathered to:
support the auditor's conclusions
131
Do most illegal acts affect the fin statements directly or indirectly?
indirectly.
132
if you uncover an illegal act at a public company, the auditor is required to notify:
the SEC
133
when auditor has reason to believe an illegal act has ocurred, he should do what?
consider accumulating additional evidence, inquire of management at a level above those who did the act, and consult with the client's legal counsel
134
what is lapping fraud?
you steal customer A's money, then you get customer B's money and apply it to A's account, then get C's money and apply it to B's account, and so on
135
what is kiting?
money is moved from one account to the other but in different time periods to inflate the amount being reported
136
does the PCAOB make auditing standards that must be followed by all CPAs?
it only makes auditing standards for public companies
137
is the PCAOB a gov agency?
no
138
what is an S-1 form?
a form that must be filed with the SEC whenever a company plans to issue new securities to the public
139
what is auditors responsibility for supplementary information such as segment info?
auditor should apply limited procedures to the required info and report deficiencies in or omission of such info
140
who creates auditing standards for private companies?
the AICPA
141
what is form 8-K?
the form filed with SEC to report a significant event
142
how long do you have to dispose of stock in a client if you inherited some unsolicited?
30 days
143
do operating leases and claims against clients for immaterial amounts impair indedpence?
no
144
are statements in the standards that include the word "should" mandatory?
they are considered presumptively mandatory- the auditor can depart from them if justification is documented
145
what is the completeness assertion concerned with?
determining that all transactions are recorded
146
in testing the existence assertion for an asset, the auditor normally works from the ______ to the \_\_\_\_\_\_\_
accounting records to the supporting evidence
147
according to SOX how long does a firm keep audit documentation?
have to keep it 7 years
148
what is the best place to put in writing the understanding between client and firm about what will take place during the audit?
the engagement letter
149
to see if checks are being issued for unauthorized purchases, the auditor would most likely select testing from the population of:
canceled checks
150
what does tracing shipping docs to sales invoices accomplish?
that all items shipments have been invoiced
151
most effective control over recorded purchases?
supporting forms such as purchases orders and receiving reports are independently compared for agreement
152
if trying to detect overstatement of sales, you start with the:
accounting records and trace to the source documents
153
what is pervasiveness?
the extent to which an exception affects different parts of the financial statements
154
difference between adverse opinion and disclaimer of opinion?
adverse opinion is stating that the financials do not fairly present the position of company in accordance to GAAP. Disclaimer of opinion is when a material uncertainty affects the financials
155
what paragraph explicitly states the auditors responsibility to express an opinion?
the opening paragraph of the standard audit report
156
when would a lack of independence cause a disclaimer of opinion?
in all cases
157
if the financials and/or footnotes fail to disclose information that is required by GAAP, what type of opinion is issued?
adverse or qualified. if qualified, an extra paragraph would be added that describes the nature of the missing info, and the opinion paragraph would have an extra sentence "except for the information discussed in previous paragraph"
158
on a public company audit, are the reports on the financial statements and internal controls issued separately or combined?
it can be either
159
what are the 2 situations which result in a qualified opinion?
1) when the statements are materially misstated due to one account balance or class of transaction that does not have a pervasive effect on the statements2)when the auditor is unable to obtain audit evidence regarding a particular account balance that does not pervasively affect the statementsEssentially either a single deviation from GAAP or a scope limitation. The report itself is very similar to an unqualified opinion but an extra paragraph is added to explain the qualification after the scope paragraph but before the opinion paragraph
160
how many paragraphs does a standard unqualified report have and what are they?
3. The introductory paragraph states the audit work performed and states the responsibility of the auditor and auditee in relation to the financial statements, the scope paragraph details the scope of the audit work, and the opinion paragraph simply states the unqualified opinion
161
when is an adverse opinion issued and how does the report change?
Adverse is the opposite of an unqualified opinion. It means that the financial statements as a whole are materially misstated and do not conform with GAAP. or the "differ pervasively" from GAAP. On the report, the scope paragraph is modified accordingly and an explanatory paragraph is added after the scope paragraph but before the opinion paragraph. In the opinion paragraph, the auditor specifically states that the statements are not in accordance with GAAP.
162
What situations would result in a disclaimer of opinion?
When the auditor is not independent or there is a conflict of interest.When a limitation on scope is imposed by the client and the auditor cant gather sufficient audit evidence.When there is a substantial going concern issue.When there are significant uncertainties in the business of the client.
163
when an auditor selects one or a few transactions and follows them through the entire accounting process, he is doing what?
a walkthrough. A walkthrough combines observation, documentation, and inquiry. PCAOB Standard 2 requires at least one walkthrough per major class of transaction
164
which section of SOX requires mgmt to issue an internal control report?
Section 404 requires auditors to assess and report on the effectiveness of the internal control over financial reporting
165
what is the definition of incompatible functions?
those that place any person in a position to both perpetrate and conceal errors or irregularities in the normal course of their duties. well designed controls should separate the duties of authorization, record keeping and custody of assets
166
what is the primary purpose of the auditors consideration of internal controls?
to determine the nature, extent, and timing of audit tests to be applied
167
if the auditor finds a reportable condition in internal controls, who should they tell first?
the audit commitee
168
if after understanding the ICs the auditor decides to perform tests of controls, the auditor most likely decided that:
it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests
169
what is the concept of reasonable assurance?
recognizes that the cost of internal controls should not exceed the benefits derived
170
7 factors of the control environment: (I see ham bone)
I- integrity and ethical valuesC- commitment to competenceH- human resource policies and practicesA- assignment of authority and responsibilityM- management's philosophy and operating styleB- board of directors or audit committee participationO- organization
171
even the best designed IC can fail due to:
human error, faulty judgement, collusion, management override
172
what are the five components of internal control? (clowns run cartels in mexico)
1) control environment2) risk assessment3) control activities4) information and communication5) monitoring
173
\*\*\*What is the process of assessing risk in general?
You assess inherent risk and control risk to determine the amount of substantive testing that must be carried out to reduce detection risk to a level so that overall risk will still achieve an acceptably low level. Acceptable audit risk is not changed.
174
what is the audit risk formula?
inherent risk X control risk X detection risk = overall audit risk
175
the auditor uses the assessed level of control risk to determine the acceptable level of
detection risk for financial statement assertions
176
if auditor increases the level of control risk because controls are found to be ineffective, the auditor would most likely increase the
extent of tests of details
177
what do assertions about existence or occurrence deal with?
whether assets or liabilities exist at a given date and whether recorded transactions have occurred during a given period
178
when an auditor assesses control risk as low, he must:
identify specific policies and procedures that are likely to prevent or detect material misstatements, and he must perform tests of controls to evaluate the effectiveness of such policies and procedures. if the tests of controls result in the control risk being assessed as low, then the auditor may limit the extent of substantive testing
179
what does 'information and communication' refer to as far as internal control within an organization?
the ability of the accounting system to generate reliable info and convey it in a timely manner to the parties in the organization that need it
180
What are the 5 assertions about classes of transactions and events for the period?Alistair Overeem Cant Cut Corners
Accuracy- amounts and other data have been recorded appropriatelyOccurrence- transactions and events that have been recorded have occurredCompleteness- all transactions and events that should have been recorded have been recordedCutoff- transactions and events have been recorded in the correct accounting periodClassification- transactions and events have been recorded in the proper accounts
181
4 assertions about account balances at end of period?Even Cain Realizes Value
Existence- assets, liabilities, and equity interests existCompleteness- all assets, liabilities, and equity that should have been recorded have been recordedrights and obligations- the entity holds or controls the rights to assets, and liabilities are the obligations of the entityValuation and allocation- assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
182
4 assertions about presentation and disclosure:Overeem Can't Complain Anymore
Occurrence & rights and obligations- disclosed events and transactions have occurred and pertain to the entityCompleteness- all disclosures that should have been included have been includedClassification and understandability- financial information is appropriately presented, described, and clearly expressedAccuracy and valuation- financial and other info are disclosed fairly and at appropriate amounts
183
why is it best to have "blind" invoices received by the receiving department?
to make sure the receiving dep counts the incoming merchandise so that they only pay for what they received
184
what is the purpose of purchase cutoff testing?
to determine that items actually received in inventory have been included in the proper period
185
what is an integrated test facility?
it puts fake transactions in with real transactions which are processed together without client employees knowing it
186
a person who mails signed checks can also:
cancel the supporting documents
187
an effective control over purchases would be to have the purchasing department authorized to:
purchase, but not initiate purchases
188
an increased extent of tests of controls is most likely to occur when:
controls appear to be effective so that the preliminary control risk assessment is low. this is because auditor can then do less substantive testing.
189
are significant deficiencies and material weaknesses supposed to be relayed orally or written to those charged with governance?
AU 325 says that sig def and material weaknesses in a public company must be communicated in writing to the audit committee of the board of directors
190
when should control deficiencies be reported?
either during the audit or after the audit's completion, within 60 days of the report release date
191
management must disclose material weaknesses in internal control if the weakness exists:
at the end of the year
192
what are the 2 types of control deficiency?
design and operations. design means its poorly designed, while operations means the people performing their tasks are doing them deficiently
193
what is ratio estimation used for?
to measure the total estimated error amount within a population
194
there is an inverse relationship between sample size and:
tolerable error. as the tolerable error decreases the sample size would increase
195
what is sampling risk?
the risk that the sample chosen doesn't accurately represent the population
196
How is the allowance for sampling risk calculated?
It's the difference between the upper limit and the deviation rate of the sample.
197
what are embedded audit modules?
coded into the clients system to collect data for the auditor
198
purpose of test data approach?
test data is entered with a known outcome into client's system to see if it produces same result
199
under the PCAOB standards, a scope limitation related to internal controls over financial reporting should result in:
a disclaimer of opinion.
200
if a control deficiency is discovered, what is the next step?
determine if it is a material weakness by gathering additional evidence
201
what opinion is rendered if there is one or more material weakness in internal control over fin reporting?
an adverse opinion
202
"if this statement is not correct... give details of difference directly to our auditors
acc rec confirmation
203
"in our opinion, these statements audited by us comply in all material respects"
comfort letter to underwriters
204
"no claims that OUR lawyer..."
management rep letter
205
"which raises substantial doubt about its ability to continue as a going concrern"
auditors report
206
CPA is associated with the financial statements, but is NOT independent
Compilation report
207
providing NEGATIVE assurance on a company's financials
review report
208
material departure from GAAP but NOT materially misstated
qualified report for GAAP departure
209
how often does an internal audit activity need to be assessed externally?
every five years.
210
what are the primary themes associated with internal audit attribute standards
(1) Purpose, Authority, and Responsibility; (2) Independence and Objectivity; (3) Proficiency and Due Professional Care; and (4) Quality Assurance and Improvement Program.
211
the 7 primary themes of the performance standards:
(1) Managing the Internal Audit Activity; (2) Nature of Work; (3) Engagement Planning; (4) Performing the Engagement; (5) Communicating Results; (6) Monitoring Progress; and (7) Resolution of Senior Management's Acceptance of Risks.
212
in a conventional graph, the 'intercept' is the point at which:
the dependent variable intersects the Y axis, and where the independent variable has the lowest value, usually zero
213
elasticity of supply?
%change in quantity supplied/%change in price
214
what is elasticity of demand?
the % change in quantity is greater than the % change in price
215
how do you prevent deflation?
you increase the money supply by lowering the reserve requirement, or lowering interest rates which stimulates demand and increases the general price level
216
what does an import quota do?
it restricts the quantity of a commodity that can be brought into the country from foreign providers. The biggest beneficiary is the domestic suppliers of the commodity.
217
3 generic strategies by Michael Porter?
cost leadership, differentiation, and focus
218
which framework is for gauging the attractiveness of the competitive environment of an industry?
five forces
219
what analysis method is for evaluating a macro-environment?
PEST analysis: political, economic, social, and technological characteristics
220
what are the five forces?
1-threat of new competition entering the market2-threat of substitute goods or services3-bargaining power of buyers of the industry good or service4-bargaining power of suppliers of the inputs used in the industry5-intensity of rivalry
221
what does SWOT stand for?
strengths and weaknesses of the entity, and the opportunities and threats faced by the entity
222
how is weighted avg cost of capital calculated?
the required rate of return on each source of capital weighted by the proportion of total capital provided by each source and then those amounts are summed.debt:30%x(10% 1-30% tax rate)=2.1%CS: 60%x12%= 7.2%PS: 10%x10%= 1%WACC= 10.3%
223
what is a compensating balance and how is the effective interest rate calculated?
an amount the borrower has to maintain in an account with a lender.the effective int rate is the cost of borrowing divided by the funds available for use.If the interest each year is 40,000 and the only amount you can actually use is 400,000, then the effective rate is 10%.
224
how is the required rate of return calculated?
risk free rate + Beta(expected rate - risk free rate)
225
basic approach to capitalize earnings to determine value of business?
annual earnings / required rate of return.
226
what is a time series model?
models based on extrapolation of past data to predict a future value
227
delphi method?
form of qualitative forecasting that involves consensus of a group of experts using a multi-stage process to converge on a forecast.
228
diff in quantitative & qualitative forecasting?
quantitative is objective and rely on math and calculations. qualitative are subjective and rely on judgement and opinion
229
what is the profitability index approach?
the relative economic ranking of projects by taking into account the cost & net present value of projects
230
average accounting rate of return?
avg annual after tax net income / avg cost of investment.the avg cost of investment is the beg book value + ending bv then divided by 2.
231
formula for calculating the profitability index of a project?
present value of annual after tax cash flows / original cash invested in the project
232
NASDAQ requires all companies have audit committees composed entirely of:
Independent directors who are also financially literate
233
can board of directors change the articles of incorporation?
no, only stockholders can do that
234
the purchase and sale of commodities for current delivery is what:
the spot market. the futures market is for delivery in the future
235
what is a specialist on the NYSE?
a NYSE member acting as a dealer in a small number of securities
236
what is a call option?
the right to purchase a security at a specified price for a defined period of time.
237
what factors make up the nominal risk free rate?
the real rate of interest and an inflation premium
238
if the Fed reserve purchases a large number of US gov securities, what is the effect?
it increases the monetary supply and puts downward pressure on interest rates
239
what is a put option?
it lets you sell a stock at a certain price for a period of time.
240
what is transfer pricing?
the pricing strategy for products and services bought and sold across international borders between related parties. it is mainly part of tax planning.
241
capital structure refers to:
all long-term debt and equity
242
the market price of a bond is the present value of the principal amount plus:
the present value of future interest payments at the market rate of interest
243
cost of capital for newly issued preferred stock?
net proceeds per share / annual costs40 sales price less 5 issuance costs = 35.if par value is 20, @9% int. payments are 1.80calculation is 1.8/35=5.1%
244
what is the CAPM formula?
Expected return= RF + B(RM-RF)RF means risk free rate.B means betaRM means return on market
245
between 2 investments with the same expected return, choose the one with:
lower projected standard deviation
246
between 2 investments with different expected returns and standard deviations, choose the one with:
lower coefficient of variation
247
What is NPV?
net present value is the present values of future cash flows less the cost of the investment. If the NPV is above zero then it's a good investment.
248
How do you calculate NPV?
it's the present value of future cash flows discounted to present value using the COST OF CAPITAL
249
what is the basic FV calculation?
FV= current amount x(1+i)^nor1,000 times(1+0.1)^5
250
what is the rule of 72?
a very close estimate for seeing how long it takes for an investment to double. You just divide 72 by the interest rate. If the interest rate is 8% you divide 72/8=9
251
what does the security market line(SML) graph?
the relationship between expected return and risk as measured by the beta coefficient
252
How to calculate the benefit cost (profitability) index?
present value of cash flows / net investment. an index greater than 1 means the project is acceptable
253
what does the equivalent annual annuity(EAA) technique evaluate?
projects that have different durations(lives)
254
times interest earned calculation?
Earnings before interest and taxes / interest expenseThis is telling you how many times you earned your interest during the period
255
cash conversion cycle?
period beg with paying cash for inventory and ending with the collection of cash from the sale of products made with that inventory
256
what is underwriting?
investment bank buys an entire offering then tries to sell it to the public at a profit
257
least expensive long-term source of capital?
long term debt because interest is tax deductible and debt is repaid first so it has less risk
258
formula to determine the cost of common stock:
next period's dividend / proceeds such as 2/50 which equals 4%. then you add this to the firms growth rate in dividends. If growth rate the cost of common stock would be 7+4 for 11%
259
what are the chronological events in the dividend payment process?
1-declaration date when board approves dividend2-ex dividend date is first date you buy stock without being entitled to the dividend3-date of record is date you must own shares by to receive dividend4-payment date is when checks are mailed
260
how is financial leverage calculated?
It is calculated by taking the percentage increase in earnings per share which is then divided by the percentage increase in earnings before interest and taxes. Here, earnings per share starts as $4.00 and increases by $2.00, a 50 percent increase. Earnings before interest and taxes starts as $300,000 and increases by $60,000, only a 20 percent increase. Therefore, the degree of financial leverage is 50 percent divided by 20 percent or 2.5.
261
what are the 4 reasons to hold cash?
transactions to meet day to day cash outflows, compensating balances required by banks, precautionary balances to meet unexpected events, and speculative balances to take advantage of opportunities
262
cash conversion cycle?
age of inventory + age of receivables - age of payables
263
4 parts of a company's credit policy?
(1) Credit period--when the payment is due; (2) Credit standards--criteria as to which customers are granted credit; (3) Collection policy--enforcement of the collection process; and, (4) Discount--reductions offered to speed up payments.
264
Your supplier gives you credit terms of 2/10 net 30. This means that if you pay within 10 days you take a 2% discount. If not, the balance is due in full within 30 days. What is the annual percentage cost to you of not taking the discount and paying on the 30th day?
Your choice is to pay $.98 on the dollar on day 10 or $1 on day 30. The extra cost is .02/.98 or .0204081. You save 20 days (30-10) by paying later. To annualize the cost take 365 days and divide by the days saved. 365/20=18.25 and multiply this by the .0204081 percent cost: (.0204081) (18.25) = 37.24%
265
A manufacturer of single engine aircraft operates 365 days per year and produces 3,650 aircraft per year. Its engine supplier takes 5 days from the time an order is placed to deliver engines. Assuming the manufacturer does not wish to carry a safety stock, at what level of engine inventory should they place an order (reorder point) for new engines to ensure that production is not interrupted?
Economic Order Quantity points (EOQ) tells you how many engines to order at one time. It is determined by taking the square root of the following result: 2 times annual demand (1,600 units) times the cost of placing an order ($50) divided by the cost of carrying a unit for a year ($1). So, (2 x 1,600 x 50) or 160,000. That is then divided by $1 so that it stays 160,000. The square root of 160,000 is 400. That is the number of units that should always be ordered. Because 1,600 are needed, the orders of 400 are placed four times per year.
266
A manufacturer of single engine aircraft operates 365 days per year and produces 3,650 aircraft per year. Its engine supplier takes 5 days from the time an order is placed to deliver engines. Assuming the manufacturer does not wish to carry a safety stock, at what level of engine inventory should they place an order (reorder point) for new engines to ensure that production is not interrupted?
In the absence of a safety stock, reorder point is equal to daily usage times the time it takes for a supplier to deliver. Daily usage is 3,650/365 or 10 x 5 days to deliver (lead time) is equal to 50 engines as a reorder point.
267
average days sales in inventory?
360 / inventory turnoverinventory turnover= COGS/ Avg inventory
268
What does a TPS do?
it supports the day to day activities of a business such as purchasing goods, sales to customers, and payroll
269
ROI calculation?
net income / avg investment
270
alternate ROI calculation?
asset turnover x profit margin on sales
271
what is the dupont ROA?
(net income/net sales) x (net sales/avg total assets)
272
asset turnover?
sales / assets
273
which risk cant be mitigated through diversification of investments?
systematic risk because it deals with the macro environment
274
what does the systems analyst do in an IT environment?
designs systems, prepares specifications for programmers, and serves as intermediary between users and programmers
275
what detects errors in data transmission?
a parity check
276
margin of safety?
difference between your actual or expected profitability and the break even point
277
what is the floor and ceiling in a transfer pricing decision?
the floor is opportunity cost plus costs of outlay. the ceiling is the market price
278
target pricing?
set prices based on what you think customers are willing to pay based on perceived value
279
economic value added?
net operating profit after taxes less cost of capital
280
does deflation encourage or discourage borrowing?
deflation discourages borrowing because people want to borrow money in times of inflation because you can repay it with money with less purchasing power
281
when interest rates increase, bond prices:
decrease. and vice versa
282
how is the overhead rate calculated?
dividing estimated overhead costs(both variable and fixed) by a budgeted or estimated quantity of a cost driver. Example: total overhead costs of 75,000 divided by 20,000 budgeted direct labor hours for a overhead application rate of 3.75 per direct labor hour
283
conversion cost?
direct labor + overhead
284
how is a spoilage question done?
normal spoilage is a manufacturing cost because it's an inherent part of production, so it is included in finished goods.Abnormal spoilage is treated as a period cost.If total units completed are 5500 with 5000 being saleable, 200 being normal spoilage, and 300 being abnormal spoilage, then 5200 is included in finished goods. so 5200/5500 times the total cost:(5200/5500)\*99,000=93,600 which is what will be debited to finished goods
285
how to use high-low method:
total costs y=a+b(x)y=total costsa=fixed costsb=variable cost per unitx=number of kilos,etcb is change in costs divided by change in kilos, or (y2-y1)/(x2-x1)
286
what does the CPU contain?
primary storage, a control unit, and an arithmetic/logic unit
287
what is primary storage?
temporary main memory portion of the CPU which is part RAM part ROM. Secondary storage consists of devices external to the CPU such as disks, flash drives, & hard drives
288
elements of assembly language:
must be translated into machine language by an assemblereasier to write programs in than machine languageit's an efficient form of second gen language
289
elements of a procedural language:
3rd gen language that concentrates on the procedures and functions of the programs. written in source code then translated into object code. source code is more similar to english but object code is the machine language for the type of computer. FORTRAN, COBOL, and BASIC are all forms of procedural languages
290
what does a JCL do?
Job control language initiates programs, specifies priorities and running sequences, and which databases are used and which files are used
291
What is the order of creating master budget?
sales budget is first, then production budget, budgeted income statement then budgeted balance sheet
292
absorption costing?
assigns all 3 factors(direct material, direct labor, and both fixed and variable manufacturing overhead) to inventory
293
direct costing?
assigns only variable manufacturing costs to inventory- which means variable manufacturing overhead
294
what does r squared actually mean?
percentage of variation in the dependent variable explained by the variation in the independent variables
295
what are x and y in a line equation?
x is the independent variable, and y is the dependent variable.
296
overhead efficiency variance?
The overhead efficiency variance is the difference between actual direct labor hours worked, and the standard quantity of hours allowed for actual production, times the variable overhead rate per hour.
297
overhead volume variance?
The overhead volume variance equals the difference between the master budget for fixed overhead and applied fixed overhead. The variance has one cause only: producing a number of units different from that specified in the master budget.
298
labor efficiency variance
The labor efficiency variance is the difference between actual direct labor hours worked, and the standard quantity of hours allowed for actual production, times the direct labor wage rate per hour.
299
material usage variance?
This variance is the difference between the actual quantity of material used, and the standard quantity allowed for the output achieved, times the standard price of material.
300
Diff between spending variance for fixed overhead and variable overhead?
The spending variance for variable overhead is the difference between the actual overhead and the budgeted overhead based on actual direct labor hours. The spending variance for fixed overhead is the difference between the actual overhead and the master budget for fixed overhead. Neither variance is affected by the denominator used for allocating fixed overhead.
301
what is incremental or differential cost?
the total difference in cost of two alternatives.
302
Residual income formula?
Residual income = operating income - required rate of return (invested capital)
303
using PERT or CPM, activity slack is?
max amount of time an activity can be delayed without delaying the entire project
304
what are the 2 distinct functions of the information systems department?
systems development and data processing
305
liason between end-users and the processing center?
the control group.
306
what are the 3 main types of system documentation?
data flow diagramssystem flowchartsentity relationship diagrams
307
What AICPA framework relates to "reliable systems"?
AICPA's Trust Services provides assurance on systems.
308
what 3 IT functions need to be separated?
programming, operations, and the library
309
daily operations of the website?
Web coordinator
310
control activities defined?
Control activities include all of the policies and procedures used within a sytem to help ensure that all management directives are performed as anticipated. Each system is supposed to perform designated tasks. Control activities are installed to ensure those tasks get accomplished efficiently and effectively.
311
5 examples of information goals?
(1) input validity - where input data be approved and reflect accurate economic events (2) input completeness - all valid events are captured (3) input accuracy - all events are captured correctly (4) update completeness - all events are reflected in respective master files (5) update accuracy - all events are reflected correctly within master file.
312
controlling computer operations is controlled by:
Segregation controls, backup and recovery, contingency processing, file protection rings and internal and external labels represent methods to control computer operations. Segregation controls represent controlling access to programs and data.
313
There are five risks associated with e-commerce, according to the Trust Services framework established by the AICPA. These risks are:
1) security, 2) availability, 3) processing integrity, 4) online privacy, and 5) confidentiality.
314
4 categories of IT resources under COBIT:
applications, which include systems and manual procedures to process information; the information itself; infrastructure, which includes hardware, equipment, and operating systems needed to process information; and people.
315
4 components of the COBIT framework's IT process model:
1) plan and organize, 2) acquire and implement, 3) deliver and support, and 4) monitor and evaluate. Abbreviated, these components are referred to as: Plan, Build, Run, and Monitor.
316
Who established COBIT?
The Information Systems Audit and Control Association (ISACA)
317
definition of net present value?
present value of cash inflows minus the net investment
318
definition of internal rate of return?
the specific discount rate that makes the present value of the inflows equal to the net investment and forces the NPV to be equal to zero
319
market value added?
market value of the firm minus the book value of the capital investment in the firm
320
economic value added?
net operating profit after taxes minus the firm's cost of capital in dollar terms
321
ROA (return on assets):
net income divided by total assets
322
ROE(return on equity):
net income divided by total equity
323
ROIC (return on invested capital)
net income plus interest divided by average total invested capital. invested capital is just interest bearing debt plus owners equity
324
what are the 4 elements of a balanced scorecard?
financial, customer, internal processes, and learning & growth
325
after a performance measure has been accepted, what is the next step?
the current level of performance should be determined (baseline performance), a designated performance rate or a designated improvement rate should be set (targets), and actions needed to achieve those targets should be designated (strategic initiatives)
326
free cash flow?
net operating profit after taxes (NOPAT), add in depreciation expense, then subtract money set aside for capital expenditures and any need for increasing working capital
327
receivables turnover?
net credit sales / avg acc receivable
328
number of days sales in inventory?
COGS divided by 365. Then divide avg inventory by the first number.
329
financial planning process:
1) analyzing the investment and financing alternatives available to a firm, 2) forecasting the future consequences for each of the alternatives, 3) deciding which alternatives to undertake, 4) measuring subsequent performance against established goals. Measuring the subsequent performance is the final step in that process.
330
what are the steps to process improvement?
1) design, 2) modeling (which involves simulation of the process), 3) execution (including training of personnel and testing of the process), 4) monitoring, and 5) optimization.
331
what is a pareto chart?
a bar chart or histogram that ranks the causes of variations in a process from most to least frequent, which is intended to indicate their effects on quality
332
what is a control chart?
measures deviations from process standards, a fishbone diagram identifies causes of defects and their effects
333
steps in project management:
project initiation, project planning, project execution, project monitoring and control, and project closure
334
a cost management system is:
a planning and control system that measures the cost of significant activities, identifies non value-added cost, and identifies activities.
335
relevant range?
level of activity where fixed costs remain fixed
336
diff between theoretical capacity and practical capacity?
Theoretical capacity assumes output is produced 100% of the time. Practical capacity adjusts theoretical capacity for non-production time such as holidays and maintenance shutdowns.
337
Utilizing the expected annual capacity approach to overhead application, can result in overapplied overhead when:
Actual overhead costs were less than expected and/or production was higher than expected.Overhead is applied based on a calculated rate per unit. This calculated rates uses estimate overhead costs divided by an estimated activity level. If either the estimated overhead is higher than the actual overhead or the estimated activity level is lower than the actual activity level, overhead can be overapplied.
338
labor rate variance?
actual rate paid minus standard hourly rate times the total hours worked
339
labor efficiency variance?
number of hours worked less hours supposed to have been worked times the standard rate
340
material price variance?
diff of total price paid and total price should have paid for the same amount
341
fixed overhead spending variance
It is the difference between the actual overhead spending and the budgeted overhead spending.
342
when doing weighted avg cost of capital calculations, what needs to have taxes removed?
the cost of capital for DEBT must be computed net of the tax benefit provided by the deductibility of the interest expense
343
how to find effective rate of interest on a compensating balance question?
cost of borrowing / funds available for useIf you have 500,000 at 8% interest that equals 40,000 in interest expense. but if you can only use 400,000, then the calculation is 40k/400k for an effective rate of 10%, not 8%
344
difference between performance standards and attribute standards
attribute standards describe the characteristics of organizations and people who perform internal audit services.performance standards describe internal auditing and identify the quality criteria applicable to the performance of the internal audit services
345
what percentage can a whistleblower get for a dodd-frank award?
10% and 30% of sanctions imposed
346
what is the slope of a demand curve?
it is negative. the lower the price, the greater quantity demanded
347
a positive GDP gap exists when:
potential GDP exceeds real GDP. This means that the economy is operating at less than full capacity- which implies unemployment and under-utilized plant and equipment
348
2 largest export countries?
germany and china- each about 9%
349
US share of worldwide GDP is:
approximately 25%
350
which type of employment is not considered in calculating full employment?
cyclical- the other 3 types can exist and still have "full employment"
351
a supply schedule shows the relationship between the quantity of a commodity that will be supplied during a period of time and:
the selling price of the commodity. A supply curve is basically saying that as price increases, more sellers would enter the market and more of the good would be supplied
352
freely fluctuating exchange rates:
automatically correct a lack of equilibrium in the balance of payments
353
what would the Federal Reserve NOT do to stimulate the economy?
Reduce tax rates. The Fed Reserve does not change tax rates. This would stimulate the economy, but tax rates are set by Congress, not the Fed. The Fed could reduce the reserve requirement, reduce the discount rate which would increase loan activity, and they could increase the money supply.
354
who controls fiscal and monetary policy?
The Fed controls monetary policy(money supply), and Congress controls fiscal policy(gov spending and taxes)
355
calculate marginal propensity to consume:
change in spending over change in disposable income
356
calculate avg propensity to consume:
% of disposable income spent on consumable goods
357
the preventive measure for deflation?
increase the money supply. this stimulates demand and increases the general price level
358
how does deflation distort reported income?
depreciation is NOT reflective of current fixed-asset replacement costs?
359
what is SWOT concerned with?
the relationship between an entity and its environment
360
what is the 5 forces concerned with?
the nature, operating attractiveness, and probably long-run profitability of a competitive industry
361
what is the basis for a natural monopoly?
economics of scale- or an increasing return to scale.
362
in a perfectly competitive market, what is the best level of output for the firm?
Marginal revenue = marginal cost.
363
the direct exchange rate expresses the domestic price (in dollars) of:
one unit of foreign currency. 1 euro to $1.15
364
PEST is acronym for:
political, economic, social, and technological
365
What does PESTEL add to PEST?
E= environmental factorsL= legal factors
366
required rate of return for an investment:
riskfree rate + beta(expected rate - riskfree rate)
367
diff in financial structure and capital structure:
financial structure includes all items of liabilities and owners equity, and capital structure includes LONG-TERM liabilities and owners equity.
368
what time series model reduces random fluctuations in data?
exponential smoothing
369
what source of new capital usually has the lowest after tax costs?
bonds. less risk to investors so they're cheaper than equity, and the interest payments are tax deductible
370
what states the terms of a bond?
an indenture
371
what is the profitability index used for?
to rank potential investments by taking into account both the time value of money and the initial cost of the project
372
what is commercial paper?
short term, unsecured promissory notes
373
calculate profitability index of a project?
divide present value of annual after tax cash flows by the original cash invested in the project
374
what is residual income that remains after the cost of all capital, including equity capital, has been deducted?
economic value added. it measures economic profit, not accounting profit. NOPAT minus cost of capital
375
accounting rate of return?
dividing accrual based net income by the initial cost of the project
376
what is EDI for?
electronic data interchange allows companies to place orders with suppliers electronically
377
what kind of network is used to process EDI?
Value added network- VANs provide the additional security and addressing capabilities necessary to process EDI transactions
378
rollback and recovery procedures are most common in:
online real-time systems. periodic snapshots are taken of a master file, and upon detection of a problem, the system reprocesses all transactions that have occurred since the snapshot
379
who designs, creates, and tests program?
application programmers
380
a fire supression system in a computer facility should include:
halon and other chemical suppressents that dont harm computer hardware
381
which critical function is most likely to be missing in a small business computing environment?
authorization
382
in a large firm, who would maintain custody of the entity's data?
the data librarian
383
what allows a database management system to add new records, delete old records, and update records?
a data manipulation language (DML)
384
What is used to verify that a program was free of unauthorized changes?
a source code comparison program. this compares an archived program to the program actually in use
385
What is PaaS?
PaaS is the use of the cloud to create (not access) software
386
what is systematic risk?
market risk. large scale economic events that typically affect all companies
387
most likely strategy to reduce breakeven point?
decrease fixed costs and increase contribution margin
388
what is six sigma similar to?
total quality management
389
what are the 4 types of costs of quality?
prevention costsappraisal costsinternal failure costsexternal failure costs
390
steps for business continuity plan
create framework and structure, identify the scope of the plan, its key roles, and assign individuals to roles. Understand and evaluate organizational risks. Define alternative methods to ensure delivery of products and services. Strategy for handling crisis incidents. embed plan in organizational culture. educate, train, and make aware.
391
If there is commercial substance to an exchange, the exchange is measured at:
Fair Value. The gain is equal to the old asset's fair value and it's book value. If the fair value was 30 and its book value is 25, the gain is 5.
392
How does retail inventory method establish lower of cost or market valuation for ending inventory?
By excluding net markdowns from the cost to retail ratio.
393
Can consolidated financial statements be prepared from a business combination that was accounted for using the acquisition method OR the pooling of interests method?
Yes to both. The pooling of interest method CANNOT be used anymore for business combinations, combinations that happened before that still need to be consolidated.
394
Does a foreign sub using the local currency as its functional currency has their financials translated or remeasured?
Translated.
395
Does a foreign sub using US dollars as its functional currency has their financials translated or remeasured?
Remeasured.
396
Under translation, common stock is translated at the what exchange rate?
The historic exchange rate.
397
500 shares of 6%, $100 par callable preferred stock are called at $101. The shares were issued at $103 per share. What is the journal entry to record the retirement?
DR preferred stock for 50,000DR PIC-preferred for 1,500CR PIC retirement of preferred for 1,000CR Cash for 50,500
398
Working capital:
current assets - current liabilities
399
Acid test:
(cash + net receivables)/current liabilities
400
Acc Rec turnover:
Sales/ avg net receivables
401
Inventory turnover:
COGS/ avg inventory
402
Times interest earned:
EBIT/ interest expense
403
Return on total assets:
(net income + after-tax interest expense)/ avg total assets
404
Return on equity:
Net income / avg owners equity
405
Dividend payout ratio
Common dividends / net income
406
What are the 2 primary qualitative characteristics?
Relevance and Faithful representation
407
2 components of relevance:
Predictive value and confirmatory value
408
3 components of Faithful Representation
Completeness, neutrality, and free from material error
409
What are the 4 enhancing characteristics?
Comparability, verifiability, timeliness, and understandability
410
Times interest earned is:
income before interest and income tax over interest expense
411
What is a central characteristic of a joint venture?
Shared control. None of the participating parties are likely to have unilateral control of the joint venture.
412
What is the defensive-interval ratio?
The ratio of quick assets to daily operating expenditures. The ratio is showing the length of time in days that the firm can operate with its present liquid resources- so it's a liquidity measure.
413
Inventory turnover ratio:
COGS/ avg inventory for the period
414
Where are G/L on remeasurment and translation booked?
Remeasurement is on the income statement, translation go in an equity account. Remeasurement is when the foreign sub's currency is the US dollar. It's translation if the sub's currency is the local foreign currency.
415
Receivables turnover ratio:
Net sales / avg net accounts receivable
416
What statements are usually included in personal financial statements?
A statement of financial condition and a statement of changes in net worth.
417
If a donation is conditional, how should it be accounted for?
As a refundable advance.
418
For donation of specialized services to a nonprofit, at what value should they be recognized?
Fair value.
419
For a NP, are contributions spread over a few years restricted or non restricted?
The contribution in the current year is non restricted(unless it comes with an actual restriction), and the contributions for future years are recognized at present value and are RESTRICTED.
420
When are the payments for an "Annuity Due" made?
At the beginning of each period.
421
How is a lease payment calculated when the lease payments are due at the beginning of the period?
You divide the FAIR VALUE of the leased equipment by the ANNUITY DUE rate.
422
What is the journal entry at the inception of a capital lease and the payments are due at the beginning of each period?
DR: Leased asset for its fair value amountCR: Lease Liability for plug amountCR: Cash for the payment amount
423
How do you calculate the interest expense at the end of the year on a capital lease with payments at the beginning of the period? What is the journal entry?
You multiply the remaining lease liability amount by the interest capitilization rate.DR: Interest expenseCR: Lease liability
424
How does the LESSOR in a capital lease determine the amount of Lease Receivable?
Multiply the payment by the number of payments.
425
What is the journal entry by the LESSOR for a capital lease with payments at the beginning of each period?
DR: Lease receivableDR: Cash for the payment amountDR: COGS for the book value amountCR: Unearned interest for the lease rec amount MINUS the BVCR: Equipment for BV amountCR: Sales for the FV amount
426
Working capital formula
current assets - current liabilities
427
Acid test formula
(cash + net receivables) / current liabilities
428
Acc Rec turnover formula
Sales / avg net receivables
429
Inventory turnover
COGS / avg inventory
430
Avg collection period for acc receivable?
Net credit sales / avg net acc receivable.... then you divide 365 by that number
431
What financial statements are required for the Governmental funds?
1)Balance sheet and 2) Statement of revenues, expenditures, and changes in fund balance
432
What statements are required for the Proprietary funds?
1)Statement of Net Postition2)Statement of revenues, expenditures, and changes in net position3)Statement of cash flows
433
What statements are required for the fiduciary funds?
1)Statement of net position2)Statement of changes in fiduciary net positiion
434
Which fund type does the government-wide financials EXCLUDE that are included on the CAFR?
Fiduciary funds.
435
What are the 3 sections of the CAFR?
1) Introductory2) Financial3) Statistical
436
If an investment in 30% of another company is accounted for using the fair value method, what is recognized as net income from the investment?
Cash dividends received and increases in the fair value of the investment are recognized in net income from the investment. The portion of the company's net income is NOT recognized in net income from the investment.
437
A contest prize expense is the present value of the?
Total cost incurred. If the prize is an annual $50,000 payment for 20 years and the company takes out an annuity of $418,250 after making the initial $50,000 payment, the contest prize expense in the current year is $468,250.
438
The ending balance of the asset retirement obligation should be the:
Beginning balance + the DISCOUNTED cash flow estimate of the new asset + accretion expense - the amount paid during the year.
439
The debt service fund records cash transfers from the general fund as what, and cash payments as what?
Operating transfers and Expenditures.
440
During a period of inflation, would a perpetual inventory system result in the same dollar amount of ending inventory as a periodic inventory system under FIFO and LIFO?
Yes with FIFO, No with LIFO. The perpetual system would be calculating COGS based on the latest goods acquired prior to each sale versus all the latest goods acquired during the period under a periodic system.
441
Does a NOL carryforward directly reduce taxes or taxable income?
Taxable income. If the NOL is 40,000 and taxable income is 60,000, then it reduces taxable income down to 20,000, which is then multiplied by the tax rate.
442
During a business combination, can the acquisition date be before, on, or after the closing date?
It can be any of the 3.
443
For state or local governments, encumbrances outstanding at year end should be reported as:
Assigned or committed fund balance.
444
What does income and dividends from a sub do to the investment account under the equity method?
Income increases the investment, and dividends reduce the investment account.
445
What is the focus of proprietary funds?
Income determination. Proprietary funds use accrual accounting and they are similar in reporting to private businesses.
446
What is the entry in the General Fund to record equipment purchased with a capital lease?
DR: ExpendituresCR: Other financing sourcesThe general fund doesn't record fixed assets. The general fund fixed asset account group would record the acquired equipment.
447
What are funds classified as that can only be used for a specific purpose because of restraints imposed by formal action of the government's highest level of decision making authority?
According to GASB Statement No. 54, amounts that can only be used for a specific purpose, because of constraints imposed by formal action of the government's highest level of decision-making authority, should be reported as Committed Fund Balance. The Restricted Fund Balance classification should be used when constraints are placed on the use of resources are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments, or (b) imposed by law through constitutional provisions or enabling legislation.
448
What is the process for recording collection of accounts that had been written off?
First you debit accounts receivable and credit allowance for doubtful accounts to restore the amounts that had been written off. Then you debit cash for the amount collected, and you credit accounts receivable to take them off the books since they've been collected.
449
In the general fund, what 3 accounts are affected when property taxes are levied?
Revenue control is credited, property taxes receivable is credited, and allowance for uncollectible taxes is credited. Bad Debt Expense is ONLY an accrual accounting concept, and IS NOT used in modified accrual accounting.
450
When the direct method for LCM is used, what is the journal entry to write down inventory?
DR: Cost of goods soldCR: Inventory
451
When using the allowance method under LCM, what is the JE to write down inventory?
DR: Holding lossCR: Allowance for LCM
452
Under the fair value option, what is recognized as income from the investment company?
Cash dividends and the increase in fair value of the investment are both recognized in net income of the investor.
453
How does the installment sale method work?
Each payment consists of return of cost and gross profit. You calculate the gross profit percentage by taking the sales price and subtracting the carrying value, and then dividing that number by the sales price. Then you multiply the principal portion of the payment by the gross profit percentage, and then add in the interest payment amount, and that is the amount of revenue to recognize. The return of cost portion of the payment is NOT recognized as revenue.
454
Gains or losses on retirement of debt used to automatically be classified as extraordinary gains or losses, but now they are:
immediately recognized in full in income from continuing operations.
455
What rate is used to calculate the amount of dividends from a foreign currency?
The spot rate on the date of declaration is used regardless of translation or remeasurement.
456
How is the refinancing of a liability due within a year treated under GAAP and IFRS?
Under GAAP, if the refinancing happens before the ISSUANCE date of the financial statements, then it can be considered long term again. Under IFRS, the refinancing has to happen before the BALANCE SHEET DATE for it to be considered a long term liability again.
457
How is interest expense and dividends paid classified as far as cash flow under IFRS?
Interest expense and dividends paid can be classified as EITHER operating or financing activities.
458
How is interest revenue and dividend revenue classified under IFRS for cash flows?
They can both be either cash flows from operating OR investing activities.
459
If the percentage of completion method cannot be applied, how are profits recognized on long-term contracts under GAAP and IFRS?
Under GAAP the profits will be recognized once the job is completed- which is the completed contract method. Under IFRS, all profits will be recognized when all the costs have been recovered- the cost recovery method.
460
If an IFRS company decides to revalue its equipment each year, what effect would a drop of $2000 in value above regular depreciation be?
It would be a 2000 expense for that year, recognized in income. BUT.... an increase in the value would go under other comprehensive income.
461
What is the main capital lease criteria under IFRS?
That the lease life is a "major portion" of the equipment life. Thus, a lease of 60% of the equipment's life would qualify as a capital lease.
462
If both parties consider a lease to be a capital lease, what interest rate do they both use under IFRS?
They both use the implicit rate built into the contract.
463
Under IFRS, a contingent loss must be recognized if it is...
More likely than not. Even just 51% vs 49% meets this criteria.
464
How is a prior service cost due to a change in the projected benefit obligation due to a contractual adjustment treated under IFRS and GAAP?
Under IFRS it is expensed immediately to the extent that benefits have vested. Under GAAP it is recorded to accumulated other comprehensive income and then amortized to expense over the years the employees are expected to work.
465
A bond with face value of 100k is sold at 110k due to a convert option into common stock. How is this recorded under GAAP and IFRS?
Under IFRS 100k would be the liability and the 10k is recorded as equity. Under GAAP the full 110k is debt until it is actually converted.
466
How is an impairment loss on equipment determined under IFRS?
A loss must be recognized if the book value exceeds the higher of the PRESENT VALUE of the future cash flows and the fair value less necessary costs to sell the equipment.
467
GAAP vs IFRS research and development costs?
Under GAAP all research and development costs are expensed as incurred. Under IFRS, research costs are expensed, but development costs are capitalized if the company believes that future economic benefits are probable and that the product being developed is commercially and technically feasible.
468
How are legal costs to successfully defend a patent treated under GAAP and IFRS?
Under GAAP the costs are added to the cost of the patent. Under IFRS the costs are expensed UNLESS the cost increase the future benefits to be derived from the asset.
469
How are biological assets valued under IFRS?
At fair value less costs to sell.
470
How is the reversal of an impairment loss recorded under IFRS?
The recovery of an impairment in value must be recognized if the circumstances that caused the impairment are reversed.
471
A company has two checking accounts: one with 100k and one with negative 10k. How are they reported under GAAP and IFRS?
Under GAAP the negative is reported as a liability, so the cash line will show 100k. Under IFRS they are netted so the cash line would show 90k.
472
In a period of rising prices, a company that wants to maximize profits will use what inventory method?
FIFO. In rising prices using FIFO, the earliest goods will be sold first which makes COGS lower and NI higher.
473
Formula for ending DV LIFO balance:
Beginning DV LIFO + (increase at base-year dollars)(price index)300,000 + (400,000 - 300,000)(1.1) = 410,000
474
What is the ceiling and floor of LCM?
Ceiling is Net Realizable Value and Floor is NRV less a normal profit margin.
475
Explain LCM
If replacement cost is within the range of the ceiling and floor, then market is replacement cost.If the RC is greater than the ceiling, then market is the ceiling amount.If RC is less than the floor, then market is limited to the floor amount.
476
How are trademarks classified, capitalized, amortized, and impaired?
They can be either definite or indefinite life, only expenditures made to external parties are capitalized, amortization depends on whether they are definite or indefinite life, as does impairment.
477
How are customer lists classified, capitalized, amortized, and impaired?
They can be either definite or indefinite life, only expenditures made to external parties are capitalized, they are amortized, impairment is decided by the recoverable cost test.
478
How is an initial franchise fee classified, capitalized, amortized, and impaired?
Can be definite or indefinite life, only capitalize expenses to external parties, amortization depends on definite or indefinite, as does impairment.
479
When a liability has a carrying value less than fair value, does an unrealized gain or loss exist?
An unrealized loss exists. It would be a debit to Impairment loss, and a credit to the liability to increase it to its fair value.
480
In financial statements prepared on the income-tax basis, how should nondeductible expenses such as meals be reported?
Included in the expense category in determination of income. These are still business expenses and need to be included to calculate income on the financial statements.
481
For grants, what is a prime factor in determining eligibility for accrual?
The expenditure of resources (spending the money)
482
What would an entity most likely do to hedge an investment in a foreign operation?
Borrow from another foreign entity with the same foreign currency as the operation being hedged. Since borrowing is a liability, any changes in the foreign currency would offset the investment.
483
If intercompany fixed asset balances are NOT eliminated, will consolidated income or loss be overstated.
Both can be overstated.
484
When there is NOT commercial substance to an exchange, gains are recognized:
In proportion to the amount of cash received.
485
Under the cost method, is the Sub's income or dividends recognized by the parent?
Dividends are recognized as income to the parent.
486
When transferring a receivable, the loss is the difference between the carrying value of the portion of the asset transferred and the cash received for the:
Transferred portion. Usually the total carrying value will be allocated between the portion of the asset surrendered and portion retained, based on relative fair values.
487
For estimating income taxes for personal financial statements, assets and liabilities measured at their tax bases should be compared to assets and liabilities measured at their:
Estimated current value and estimated current amount.
488
Before assets are distributed as a property dividend, the unrecognized holding gain or loss is:
Recognized. If a firm pays a property dividend of a stock it bought for 20,000 when its market value is 25,000, there is a debit to retained earnings for 25,000 and a gain on disposal of 5,000 is recognized.
489
Bond prices and interest rates are inversely related. When interest rates increase,
the market value of bonds decrease, because there are now better opportunities on the market.
490
Are fund-based statements or government wide statements included on a CAFR?
They both are. The gov-wide statements focus on the financial results and health of the gov while the fund based statements report how various revenues are derived and spent.
491
What are the 3 columns on the gov-wide statements?
Gov activities, business type activities, and total gov activities
492
Which funds are not included in the gov-wide financial statements?
Fiduciary funds.
493
How is an internal service fund reported on the gov wide statements if another gov agency is its main beneficiary?
As a gov fund instead of a business type fund.
494
What accounting basis is used to report the gov wide financial statements?
Full accrual accounting.
495
What statements are required for the gov wide statements?
The statement of net position and the statement of activities
496
How would 5 year bonds appear in the fund based statements and the gov wide statements?
They wont show up in the fund based statements because they aren't a claim against current assets. They will show up as a long term liability in the gov wide statements.
497
Does a firm selling put options on its own stock affect liabilities or equity?
It increases liability by the fair value of the options.The liability will be extinguished when the option is exercised or when it expires.
498
When computing avg shares outstanding during the year, how are stock dividends treated?
Stock dividends are treated as outstanding for the entire year. It is when new stock is issued that it is multiplied by the portion of the year remaining.
499
Is additional compensation to former shareholders after a business combination considered additional costs of the business combination?
No.
500
Can a forecasted transaction be hedged?
Yes- in a cash flow hedge since it is forecasted and therefore subject to changes in related cash flow.
501
Is a finder's fee for a lease expensed or allocated over the lease term?
The finder's fee benefits the entire lease term and is therefore expensed evenly over the lease term.
502
What exchange rate is used to TRANSLATE a foreign sub's income statement?
The average exchange rate.
503
If a company changes from FIFO to weighted avg inventory during 2005, how is the cumulative effect of the change measured?
The change is measured as of the beginning of the year of change.
504
Are the direct costs or the general expenses in a business combination deducted from the corp's net income from the combination?
Both are expensed in the period incurred.
505
Does the recording of an asset retirement obligation for a natural resources development site increase the liability or the depletion base?
Both. It is a credit to a liability, and a debit to the natural resources account, which is the depletion base.
506
Under international accounting, the vested portion of prior service cost is immediately recognized in:
Pension expense. The unvested portion is gradually recognized under delayed recognition in pension expense.
507
If financial statements prepared on another basis besides GAAP are not appropriately titled, the auditor must:
Disclose any reservations in an explanatory paragraph and qualify the opinion for the inappropriate title of the statements.
508
Under IFRS for SMEs, which inventory valuation method is NOT allowed?
LIFO.
509
Personal financial statements should report assets and liabilities at:
Estimated current values(fair values) at the date of the financial statements.
510
What financial statements are included in a set of personal financial statements?
A statement of financial condition (balance sheet) is always included, and a statement of changes in net worth may be included, but is NOT required.
511
In a personal statement of financial condition, a life insurance policy should be reported at cash surrender value less any:
Loans outstanding against the policy.
512
In a cash flow hedge, the item being hedged is measured using:
The present value of expected cash inflows or outflows. The item being hedged could be associated with an asset, a liability, or a forecasted transaction.
513
What is the purpose of reporting comprehensive income?
To summarize all changes in equity from nonowner sources.
514
What are the "other comprehensive income" items? (4)
Unrealized G/L on AFS securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.
515
Who pays the shipping with FOB shipping point?
The title passes to buyer at the shipping point, so the buyer is responsible for paying the shipping charges.
516
Who pays the shipping with FOB destination?
The seller pays shipping charges to get the goods to the buyer. The title passes to the buyer once they reach their destination.
517
Under IFRS, how should a company report their investments in bonds when it is a part of their business model to hold such investments solely to receive the cash and interest from principal repayment?
At amortized cost.
518
Can impairment losses on intangibles be reversed?
No. Losses on plant assets held for disposal can be reversed to the extent of previous losses but intangible impairment losses cannot be reversed.
519
Which governmental fund type can report a positive amount in the Unassigned fund balance?
The general fund. Other governmental funds cannot have a positive balance in their unassigned fund.
520
In a sale-leaseback, how is the gain on sale recognized?
It is amortized over the lease term. A 50,000 unearned gain on a sale-leaseback over 10 years will result in 5,000 being recognized in each of the 10 years.
521
If a city imposes a 2% tax on hotel charges which will be used to promote tourism in the city, what type of nonexchange transaction is this?
It is a Derived Tax Revenue.
522
How are the different governmental funds reported on the fund-based balance sheet?
The general fund has its own column, then the major funds each have their own column, and then the rest of the individual funds that are not considered major are grouped into a single column.
523
A fund balance is the amount of assets greater than liabilities. What are the different classes of the fund balance?
Unrestricted- which means it's none of the below and is available for future use.Nonspendable and restricted. This means the money is restricted as to use by an outside party.Committed means the money is committed to a specific use by the highest level of decision making.Assigned means the money has been assigned by officials that are NOT the highest level of authority.
524
If a city plans on collecting $10k a month from property taxes for the next 18 months, how much revenue should be reported in year one?
$140,000. 10k for each month of the year plus Jan and Feb of the following year.
525
How is $10k of bonds reported on the gov wide and fund-based statements?
They are a regular liability on the gov wide statements and "other financing source" on the fund based statements.
526
How is a bond due in 3 months reported on the gov wide & fund-based statements?
It is 'bonds payable' on both.
527
If a city takes on a project but accepts no liability for the work being done, what type of fund is used.
An agency fund.
528
How does a transfer from the gen fund to capital projects get reported?
The general fund shows a "other financing use", the capital projects fund shows a "other financing source", and both balances will show up in the total gov funds column. This are no eliminations of "intercompany transactions".
529
What is the difference between the purchases method and consumption method for the government fund accounting?
Under purchases, the whole purchase is immediately recognized as an expenditure. Under the consumption method, the supplies are moved to expenditures as they are used.
530
Is a computer or office supplies reported as an asset on the fund-based governmental statements?
Office supplies are an asset- capitalized assets such as a computer are not.
531
how is a capital lease recorded in the gov fund-based statements?
The PV of the payments is recorded as an expenditure, and an increase in 'other financing sources'.
532
Do infrastructure assets get depreciated?
They do unless the modified approach is adopted. Then you have to set a minimum level of acceptable condition and maintain documentation to show that the asset is kept at that level.
533
For general purpose gov statements, is MD&A required?
Yes, it must be included but it is separate from both the gov wide & fund-based statements.
534
What are the 3 requirements to be a special purpose gov?
1) separately elected governing body. 2) It is legally independent so that it can sue, be sued, and buy and sell property in its own name. 3) Be fiscally independent of all other governments.
535
On the statement of activities, what is included in program revenues?
Any revenue generated by the activity, as well as any grants related specifically to that activity. This is then netted against the expense.
536
In troubled debt restructuring, what does the creditor do, and how do they recognize interest on the restructured loan?
They reduce the amount owed to the present value of future cash flows on the ORIGINAL interest rate. Then, they recognize interest by using the original interest rate times the BV of the new receivable. The debtor recognizes a loss as the difference between the current BV of its receivable and the present value of the future cash flows.
537
In troubled debt restructuring, what does the debtor do?
They compute the total cash flows now owed. So you take the future interest payments and add them to the new principal amount.
538
If you have an investment that isn't enough to be equity method, then you invest more later that does take it to equity method, how is that treated?
The equity method is retroactively applied to the first amount. So if you owned 10% the whole year then bought another 20% at year end, you would recognize 10% of the company's earnings under the equity method.
539
How is a capitalized interest problem done? (average accumulated expenditures)
First calculate the average accumulated expenditures. That is taking the amounts spent through the year each multiplied by the portion of the year remaining.Next you calculate avoidable interest. Avoidable interest is the interest on the construction specific loan(s), and then the amount of other debt above the amount of the construction loans.Then calculate actual interest. The lesser of the avoidable interest and the actual interest is the amount that can be capitalized.
540
When converting financial statements using translation, paid in capital accounts are translated using the ______ rate?
Historic rate in effect when the account arose or the investment was made.
541
If a firm buys land to build a warehouse on, is the interest from the land loan and the warehouse construction capitalized?
Only interest on the warehouse construction can be capitalized.
542
If a firm is going to discontinue a segment early next year, but there is a loss in that segment ending this year, how is that loss reported?
As an operating loss of the discontinued segment. This section is below income from continuing ops but above extraordinary items.
543
What is an accelerated filer and how long do they have after their fiscal year end to file their 10-K?
Aggregate worldwide market value of voting and nonvoting stock of $75 million or more, but less than 700 million. They have 75 days to file 10-K.
544
What is a large accelerated filer and how long do they have after their fiscal year end to file their 10-K?
Market cap of 700 million or more. They have 60 days to file their 10-K.
545
A foreign currency transaction is settled in ______ but measured and recorded on the US entity's books in \_\_\_\_\_\_\_\_.
Non dollarsDollars.
546
Where are foreign currency exchange gains or losses on acc rec reported?
In current income as an item of income from continuing operations.
547
What disclosure is required relating to sinking funds and long term debt?
FAS 47 requires the disclosure of the aggregate amount of maturities and sinking fund requirements for all long-term debt for each of the five years following the balance sheet date. The detail of each year for both is shown.
548
When does a liquidating dividend occur?
When the investee pays more income than was earned during the period the investor owned the shares of the investee.
549
Describe the cost method:
The cost method is for an investment that DOES NOT give the investor significant influence. The dividends are recognized in income of the investor. The investment remains on the balance sheet at cost unless there is a permanent decline in value, or there is a liquidating dividend.
550
Under IFRS, are gains and losses on the changes in fair value of equity investments reported in the income statement or in other comprehensive income?
It can be either. If the investment is held for trading purposes, then the changes in fair value are reported in profit/loss.If it's NOT held for trading, the investor may elect to report changes in fair value through other comp. income.
551
What type of investments can be transferred between categories under IFRS?
Only debt. Equity securities are not allowed to be transferred between categories under IFRS. When investments are transferred, prior period statements must be restated for comparative purposes.
552
Under IFRS, if debt securities are held NOT as part of the business plan, what are they measured at?
Fair value.
553
Under IFRS, if debt securities are held as part of the business plan, what are they measured at?
Amortized cost.
554
Under the equity method for GAAP, what effect does the sub's income and dividends have on the investor's investment account?
The investor's share of income increases the investment account, and dividends decrease the investment account. The investor's share of income from the investee is also recognized as income for the investor.
555
Which form of business combination results in a NEW legal entity?
Consolidation. In consolidation, 2 or more existing entities are combined into one new legal entity.In a merger, one pre-existing entity is combined into another pre-existing entity. In an acquisition, one entity acquires a controlling interest and both continue to exist as separate legal entities.
556
Accretion expense is essentially growth in the:
Asset retirement obligation.
557
Purchases of treasury stock do not affect retained earnings under the:
Cost method.
558
Return on equity is considered what kind of ratio?
A profitability ratio
559
What is the defensive-interval ratio and what type of ratio is it?
It is the ratio of quick assets to daily operating expenditures. It is a liquidity ratio.
560
Does the cost method or the fair value method require a reconciliation of the changes in carrying amounts between the beginning and end of a period?
They both require said reconciliation.
561
If a decline in inventory value is not considered temporary, the decline is recognized in the quarter in which the decline occurs. Later recoveries are:
Recognized as gains to the extent of the previous losses only.
562
A discount on a bond is essentially:
Extra interest expense.
563
Which regulation governs the form and content of financial statement disclosures?
Regulation S-X.
564
The notional amount in a derivative refers to:
The specified unit of measure. If you have an option to buy 100 shares, the notional amount is the 100 shares.
565
Where does a first time adopter of IFRS recognize the adjustments required to present its opening IFRS statement of financial position?
In retained earnings.
566
What are the 4 components of the IASB monitoring board? (1 on top, 3 on bottom)
The IFRS foundation is on top, and below it is the IFRS advisory council, the IASB, and the IFRS interpretation committee.
567
What does the IFRS foundation do and how long is their term?
They appoint members of the IASB, the IFRS Advisory Council, and the IFRS interpretations committee. The trustees serve 3 year terms
568
What are the objectives of the IFRS foundation? (4)
To develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards. To promote us and rigorous application of IFRS. To consider the needs of a range of size and type of entities. To promote and facilitate adoption of IFRS through convergence.
569
What does the IASB do?
They establish IFRS reporting standards, but they do NOT have enforcement power. Enforcement is the responsibility of the securities regulators in the national jurisdictions.
570
What is the IFRS advisory council and who appoints them?
They advise the IASB on priorities and the views of interested organizations. Members are appointed by the IFRS foundation
571
What does the IFRS interpretations committee do and who appoints the members?
They are similar to the FASB's emerging issues task force: they identify issues in the context of IFRS, their interpretations are reviewed by the IASB. The members are appointed by the IFRS foundation.
572
What is an SME?
Small and medium-sized entities. IFRS has one single standard for companies that are not publicly traded. Revisions to SME standards only happen once every 3 years.
573
What are the 2 assumptions in the IASB framework?
That the accrual method is used, and that the entity is a going concern
574
What statements are required for a first-time adopter of IFRS?
Upon adoption, the first set of statements must have 3 statements of financial position, 2 statements of comprehensive income, two separate income statements, two statements of cash flows, and two statements of changes in equity. Basically they need 3 balance sheets and 2 of everything else.
575
What is the TRANSITION date of a company to IFRS?
The opening date of the balance sheet for the earliest comparative financial statements. If the first IFRS reporting date is as of Dec 31 Year 2, then the transition date will be Jan 1 year 1.
576
Upon first time adoption of IFRS, an entity can elect to use fair value as deemed cost for:
Any individual item of property, plant, and equipment.
577
What is the first reporting date when switching to IFRS?
The year end date for the period which IFRS is first applied.
578
What are the major characteristics of IFRS for SMEs?
Disclosures are simplified. LIFO is prohibited. Goodwill and indefinite life intangible assets are amortized over a period NOT exceeding 10 years. Depreciation is based on a component approach. Simplified temporary difference approach to income tax accounting. Reversal of impairment charges is allowed in some circumstances. No disclosures for earnings per share and segment disclosures.
579
Can revenue and AR from a sales commitment be recognized?
Yes. IFRS defines revenue from a balance sheet point of view and is based on the inflow of economic resources.
580
What is the difference in transfer of receivables under GAAP and IFRS?
GAAP focuses on whether control has shifted from the transferor to the transferee. IFRS focuses on whether the transferor has transferred the rights to receive cash flows from the receivable and whether or not substantially all the risk and rewards of ownership were transferred.
581
What is the general rule of IFRS when it comes to the value of assets?
That assets aren't carried at more than their recoverable amount. If the asset's carrying value is greater than the amount that could have been recovered through the asset's use or by selling the asset, then it is impaired.
582
What is the definition of RECOVERABLE AMOUNT under IFRS?
The higher of the fair value less cost to sell or the value in use. Fair value less cost to sell is the amount obtainable from the sale in an arms-length transaction. The value in use is the discounted present value of the future cash flows expected from the asset.
583
What is a CGU under IFRS?
A cash generating unit is the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.
584
Does IFRS permit recovery of an impairment loss?
Yes.
585
Whats the difference in GAAP and IFRS of the reversal of an inventory write-down?
Under IFRS a reversal is allowed. Under GAAP it is NOT allowed.
586
How often is useful life and depreciation method reviewed under IFRS?
Annually. Under GAAP it's only when events or circumstances change.
587
Component depreciation GAAP vs. IFRS
Under IFRS, when an item of PPE comprises of individual components for which different depreciation methods or rates are appropriate, each component is depreciated separately.
588
PPE revaluation GAAP vs IFRS
PPE can be remeasured to fair value if fair value can be reliably measured.
589
Where does an increase in PPE's fair value ABOVE its original cost go under IFRS?
It goes into a revaluation surplus account which is in OCI. If a truck had gone down in value 10k then back up 15k in the next year, the first 10k would be in the profit and loss statements. The extra 5k would go into the revaluation surplus account in OCI.
590
What investment classifications exist under IFRS?
Held to maturity which is debt measured at amortized cost, and Fair value, all equity is at fair value.
591
Difference of HTM classification in GAAP vs IFRS:
Under GAAP the test is whether the firm has the positive ability and intent to hold to maturity. Under IFRS it's the business model test, which evaluates if holding the debt for the cash flow is part of the business model.
592
Transfer from HTM differences GAAP vs IFRS
In GAAP you transfer from HTM when you no longer have the positive ability and intent to hold to maturity. Under IFRS you transfer from HTM only when the business model objective changes
593
OCI for investments differences in GAAP vs IFRS:
In GAAP gains/losses are recorded in OCI ONLY for AFS securities. In IFRS the entity may ELECT to records gains/losses to OCI at the initial measurement, but the election cannot be undone.
594
IFRS investment property
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595
What is a small stock dividend?
Below 20 to 25 % of the previously outstanding shares.
596
What effect do stock dividends have on retained earnings?
If it is a SMALL dividend they reduce RE by the amount of shares issued X current stock price.If they are a LARGE dividend (bigger than 25%), they are recorded at par value.
597
JE for treasury stock purchase under cost method?
DR: Treasury stockCR: CashContributed capital is NOT affected. If treasury shares are resold at less than cost, then retained earnings is reduced by the difference in cost and reissue price.
