CPA_Review_FAR_cards_Pederson Flashcards
1
Q
Establish objectives and concepts used as a framework for developing accounting standards
A
FAR
2
Q
Single source of US GAAP and the place to research accounting guidance
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FAR
3
Q
Provide information that is useful in investment/credit decisions – information about economic resources, claims against the entity, and financial performance
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FAR
4
Q
Needs of the users of financial statements
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FAR
5
Q
Investors and creditors
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FAR
6
Q
NAME?
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FAR
7
Q
Underlie the 6 components of the conceptual framework
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FAR
8
Q
For information to be useful, it must be relevant and represented faithfully
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FAR
9
Q
Information capable of making a difference in a user’s decision. Components include:
- Predictive Value
- Confirmatory Value
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FAR
10
Q
Information that improves a decision maker’s ability to predict
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FAR
11
Q
Information that enables users to confirm or change expectations
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FAR
12
Q
NAME?
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FAR
13
Q
Information that is complete, neutral, and free from error
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FAR
14
Q
Includes all information needed by a user to understand the item. Includes descriptions, amounts and explanations.
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FAR
15
Q
Financial information that is free from bias
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FAR
16
Q
NAME?
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FAR
17
Q
- Identify potentially useful items
- Identify information about those items that is most relevant if represented faithfully
- Determine if information is available and can be represented faithfully
- If not, start over at #2 with next most relevant item
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FAR
18
Q
Characteristics that enhance the usefulness of information
- Very desirable but not required
- Include comparability, verifiability, timeliness and understandability
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FAR
19
Q
- Ability of users to compare information about 2 or more entities or to compare information about 1 entity among 2 or more periods
- Allows users to understand similarities and differences
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FAR
20
Q
NAME?
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FAR
21
Q
Based on direct or indirect evidence, knowledgeable and independent people could reach consensus that the information is represented faithfully
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FAR
22
Q
Making information available in time for users to make decisions
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FAR
23
Q
Presenting information clearly and concisely
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FAR
24
Q
NAME?
A
FAR
25
Pervasive constraint where the benefits of financial reporting methods must outweigh the costs
FAR
26
1. Assets
2. Liabilities
3. Equity
4. Revenues
5. Expenses
6. Gains
7. Losses
8. Investments by owners
9. Distributions to owners
10. Comprehensive income
FAR
27
Probable future economic benefits resulting from past transactions
FAR
28
Probable future sacrifices of economic benefits resulting from past transactions
FAR
29
Residual interest in assets after deducting liabilities
FAR
30
Inflows or increases to assets from delivering goods or services or settling liabilities
FAR
31
Outflows or decreases to assets or increases to liabilities from delivering goods or services or conducting main operations
FAR
32
Increases in equity from transactions not related to revenue or investments
FAR
33
Decreases to equity from transactions not related to expense or distributions
FAR
34
Increases to equity resulting from transfers of assets, receipt of services or reductions of liabilities in exchange for ownership interests
FAR
35
Decreases in equity resulting from transferring assets, delivering services or incurring liabilities in exchange for decreasing ownership interests
FAR
36
Change in equity from all sources except investments by owners and distributions to owners
FAR
37
The process of recording a financial statement item
FAR
38
Earnings are measured by the change in assets and liabilities during a period
FAR
39
Earnings are a measure of an organization's effectiveness in using inputs to sell outputs
FAR
40
Recognition establishes when an element should be recorded and measurement dictates the amount
FAR
41
1. It meets the definition of an element
2. It can be reliably measured
3. It is relevant
4. It is reliable
FAR
42
1. Historical cost
2. Current cost
3. Fair market value
4. Net realizable value
5. Present value
FAR
43
#NAME?
FAR
44
Recognizing revenues and expenses that are directly related to each other at the same time
FAR
45
- Revenues are recognized when earned and expenses are recognized when incurred
- Example:
- Advertising recorded as a prepaid asset if it has been paid for but not been run; recorded as expense if the advertising has run even it has not been paid for
FAR
46
Include:
-Changes in accounting principle (Retrospective Application)
-Changes in accounting estimate (Prospective Application)
-Changes in reporting entity (Retrospective Application)
Exclude:
-Correction of an error (Restatement)
FAR
47
#NAME?
FAR
48
#NAME?
FAR
49
#NAME?
FAR
50
The change in COGS and inventory related to a change from weighted average costing to FIFO
FAR
51
The change in the bonus amount due to management based on changing net income because of the change from weighted average costing to FIFO
FAR
52
1. Cumulative effect of changes shown in beginning asset and liability balances
2. Beginning retained earnings is adjusted based on the changes
3. The activity and ending balances for each period shown is adjusted to reflect the effects of the changes in those specific periods
4. If the cumulative effect is calculable but the period-specific effects are not, the cumulative effect is used to adjust the beginning balances for assets and liabilities with an offset to beginning retained earnings
5. If determining the cumulative effect is impracticable, the change is applied prospectively
FAR
53
It is impracticable if one of these is met:
1. Company made reasonable efforts but could not calculate the impact
2. Retrospective application requires assumptions about management intentions in a prior period that cannot be independently verified
3. Retrospective application requires significant estimates and it is not possible to obtain objective estimates
Example - Change to LIFO; it is impractical to estimate prior year LIFO layers
FAR
54
Only allowed if there are new pronouncements or if the company is changing to an alternative principle that is preferable
FAR
55
1. Nature of the change
2. Description of the prior period items
3. Reason for the change
4. Why the new method is preferable
5. Method used to apply the change
6. Impact of the change on Income from Continuing Operations, Net Income, and EPS
7. Cumulative effect of the change on retained earnings as of the earliest period presented
8. If retrospective application is impracticable - why and a description of the method used to account for the change
9. Description of indirect effects
10. Indirect effects recognized in the current period and the per share amounts
11. Unless impracticable, the amount of indirect effects of the change and the per share amounts for each prior period presented
FAR
56
#NAME?
FAR
57
- Accounted for on a prospective basis, impacting current and future periods only
- A change in estimate resulting from a change in principle is accounted for as a change in estimate
- An example is changing useful lives for depreciation
- All disclosures rel
FAR
58
#NAME?
FAR
59
- A change in the structure of an organization
- Examples are changes in subsidiaries or changes in the use of the equity method for an investment
- Applied retrospectively for all periods presented
- Previously issued interim statements are also reported o
FAR
60
1. Nature of the change
2. Reason for the change
3. Net Income, OCI and per share amounts
FAR
61
Accounted for as a prior period adjustment through restatement
FAR
62
1. Income from Continuing Operations
2. Discontinued Operations
3. Extraordinary Items
FAR
63
To enable users to analyze future cash flows
FAR
64
#NAME?
FAR
65
#NAME?
FAR
66
A program planned and controlled by management that materially changes either the scope of business or the way in which business is conducted
FAR
67
#NAME?
FAR
68
#NAME?
FAR
69
#NAME?
FAR
70
#NAME?
FAR
71
Should provide extensive disclosure about the nature and effects of the restructuring
FAR
72
Assets must comprise a component with operations and cash flows that are clearly distinguished from the rest of the entity
FAR
73
#NAME?
FAR
74
Need both:
1. Operations and cash flow will be eliminated
2. No significant involvement after disposal
FAR
75
For prior periods, remove these discontinued operations amount from their income statement lines and net into one number reported as Income (Loss) From Discontinued Operations:
- Revenue
- COGS
- Operating expense
- Income tax
FAR
76
There are 2 reporting options:
1. At the bottom of the income statement to get from NI to CI (preferred method)
2. In a separate statement immediately following income statement (must start with NI)
FAR
77
1. Unrealized gains/losses on AFS securities
2. Unrealized gains/losses on foreign exchange
3. Reclassification adjustments of previously reported unrecognized gains/losses to realized gains/losses
4. Adjustments to correct the funded status of pension plans
FAR
78
3 reporting options
1. In equity on the balance sheet
2. In the statement of equity
3. In the footnotes
FAR
79
Financial statement that shows balances in assets, liabilities and equity as of a certain date
FAR
80
Assets expected to be realized within one year
FAR
81
Liabilities expected to be satisfied using current assets or other current liabilities within one year
FAR
82
#NAME?
FAR
83
Events after the balance sheet date but prior to financial statement issuance (SEC filers) or availability for issuance (non SEC filers)
- Applies to interim and annual statements
- 2 types - recognized and non-recognized
FAR
84
Subsequent events are recognized in the financial statements if the condition existed as of the balance sheet date
- Example - warranty claims or bad debts
- Settlements that occur after the balance sheet date but before issuance should be recognized
FAR
85
Condition did not exist as of the balance sheet date.
- Example is a fire one week after year end
- Not recognized in financial statements until event occurs
- If major, event should be disclosed
FAR
86
1. Operating Activities
2. Investing Activities
3. Financing Activities
FAR
87
Investments with original maturities of 3 months or less that are readily convertible to cash and so close to maturity that there is little risk due to changing interest rates
FAR
88
Treasury bills, commercial paper, money market funds, and certificates of deposit
FAR
89
Purchases of cash equivalents do not represent cash outflows or inflows, so they are not reported in the statement of cash flows
FAR
90
Enable users of the financial statements to evaluate:
1. Ability to generate positive cash flow
2. Ability to pay liabilities and dividends
3. Difference between income and the change in cash
4. Cash and noncash investing and financing
FAR
91
#NAME?
FAR
92
Purchasing or selling fixed assets or investments, lending and collecting on loans
FAR
93
Equity and debt transactions such as borrowing money, repaying loans, issuing equity, share buybacks, paying dividends
FAR
94
There are 2 methods to preparing a cash flow statement - the direct method and indirect method
FAR
95
#NAME?
FAR
96
Operating Activities section:
- Cash received from customers
- Cash paid to suppliers
- Cash paid for operating expenses
- Cash paid for interest
- Cash paid for income taxes
FAR
97
Net Sales + Beginning A/R - Ending A/R - A/R Write Offs
FAR
98
COGS + Ending Inventory + Beginning A/P - Depreciation & Amortization - Beginning Inventory - Ending A/P
FAR
99
Operating Expenses + Ending Prepaids + Beginning Accruals - Depreciation & Amortization - Beginning Prepaids - Ending Accruals
FAR
100
Interest Income + Beginning Interest Receivable - Ending Interest Receivable
FAR
101
Interest Expense + Beginning Interest Payable - Ending Interest Payable
FAR
102
Tax Expense + Beginning Taxes Payable - Ending Taxes Payable
FAR
103
#NAME?
FAR
104
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FAR
105
There are different treatments depending on the phase of the lease you are in
- At inception cash used by investing activities increases due to the purchase of the fixed asset and cash provided by financing activities increases as the entire purchase is financed
- For ongoing payments the reduction in the capital lease obligation is reported as cash used by financing activities as payments are made
FAR
106
Companies with at least $10 million in assets and 500 shareholders and securities on an exchange or OTC market must register
FAR
107
Company with registered securities
FAR
108
Describes the requirements for SEC financial statements
FAR
109
- Annual report (Form 10-K)
- Quarterly report (Form 10-Q)
- Information statements (Form 8-K)
FAR
110
#NAME?
FAR
111
- Less detail than 10-K
- Reviewed (not audited) quarterly financial statements
- Each year has three 10-Q's and one 10-K.
FAR
112
- Issued when there are material events
- Must be within 4 business days of the event
- Examples are mergers/acquisitions, change of directors or upper management, change in operations, change in auditors
FAR
113
SEC requires 2 years for the balance sheet and 3 years for the income statement and statement of cash flows
FAR
114
Reporting financial results that cover a period of less than 12 months (e.g. quarterly)
FAR
115
Provide timely information
FAR
116
Each interim period must stand alone with no exceptions to year-end reporting
FAR
117
#NAME?
FAR
118
1. Gross profit method is allowable
2. LIFO layer liquidations use estimated replacement cost if they will be replaced by year-end
3. Temporary declines in market value are not recognized
4. Planned variances should not be recognized if they will be absorbed by year-end
FAR
119
#NAME?
FAR
120
Use current estimated annual tax rate to calculate including all available tax planning alternatives, foreign tax rates and tax credits plus differences in rates used in prior quarters
FAR
121
Should be retrospectively applied to the first day of the year, impacting current quarter retained earnings (not income) if it is the 2nd, 3rd or 4th quarter
FAR
122
Spread to later interim periods and to other annual periods if not run immediately
FAR
123
No differences for interim reporting
FAR
124
Recognized in the interim period incurred, not spread to other periods
FAR
125
#NAME?
FAR
126
Part of a business generating revenue and expense that has discrete financial information evaluated by those who make decisions on how to run the business
FAR
127
- Segment for which financial information needs to be disclosed
- There are 3 tests - Only need to meet 1
1. Segment revenue is 10% of total revenue
2. Profit or loss is 10% of total profit or loss
3. Segment assets are 10% of total assets
FAR
128
Only shown in segments if they are used internally by the chief operating decision maker (CODM) to evaluate the segment
FAR
129
#NAME?
FAR
130
- At least 75% of revenue must be covered by segment reporting
- Keep adding segments below 10% until you get to 75% or 10 segments
- 10 is the maximum number of segments
FAR
131
- Aggregation done before the 10% tests
- Similar segments can be added together if they have similar:
1. Products or services
2. Production processes
3. Type of customer
4. Distribution methods
5. Regulations
FAR
132
1. Description of segment
2. Any aggregation
3. Revenue by segment
4. Intersegment revenue by segment
5. Interest revenue and expense by segment
6. Depreciation and amortization by segment
7. Unusual or extraordinary items by segment
8. Equity method investments by segment
9. Tax expense by segment
10. Noncash items by segment
11. Differences in measurement between segments
12. Reconciliation from segment totals to consolidated totals
13. Restatements of segment information
FAR
133
If not part of segment disclosures:
1. External revenue for each product line
2. Domestic/foreign split for revenue and assets
3. Material revenue or assets by country
4. Basis for determining country revenue
5. Customers that are 10% or more of revenue
FAR
134
1. Investments
2. Derivatives
3. Asset Impairments
4. Asset Retirement Obligations
5. Goodwill
6. Business Combinations
7. Troubled Debt Restructurings
FAR
135
1. Identify the asset or liability
2. Determine th eprinciple or most advantageous market
3. Determine whether value is based on usage or sale
4. Determine the valuation technique
5. Obtain relevant inputs
6. Calculate fair value
FAR
136
#NAME?
FAR
137
The most active market
FAR
138
#NAME?
FAR
139
1. Independent
2. Knowledgeable
3. Able to buy/sell
4. Willing to buy/sell
FAR
140
#NAME?
FAR
141
If the highest and best use is to use the asset with other assets, valuation is based on the sale price of the asset considering other assets to be used with it
FAR
142
If the highest and best use is to sell the asset on a stand-alone basis, the valuation is based on the amount to be received if the asset were sold by itself
FAR
143
1. Market Approach
2. Income Approach
3. Cost Approach
FAR
144
- Uses prices of similar assets or liabilities observable in a market
- Examples are commodity or stock exchanges
- Market valuation is considered Level 1 or Level 2
FAR
145
- Uses the present value of future cash flows or income
| - Income valuation is considered Level 3
FAR
146
- Uses replacement cost less obsolescence
| - Cost valuation is considered Level 3
FAR
147
Accounted for as a change in estimate
FAR
148
#NAME?
FAR
149
#NAME?
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150
- Based on unobservable inputs, like a company's own assumptions or forecasts
- Considered the least reliable evidence of fair value
FAR
151
#NAME?
FAR
152
Cash, ownership of another entity, or rights to receive cash
FAR
153
An obligation to pay cash
FAR
154
1. Firm commitments of financial instruments
2. All financial assets
3. Loan commitments
4. Nonfinancial insurance contracts with a 3rd party
5. Warranty with a 3rd party
6. Host financial instrument that is an embedded nonfinancial derivative separated from a nonfinancial hybrid instrument
FAR
155
1. Pensions
2. Share based payments
3. Stock options
4. Post-employment benefits
5. Disposal activities
6. Financial instruments reported as equity
FAR
156
Must be elected on the date an item is first recognized, on the date a firm commitment is entered into, or the date financial assets cease to qualify for fair value reporting
FAR
157
Applied to all claims and obligations for contract
FAR
158
Gains and losses for changes in fair value are reported in earnings
FAR
159
2 options:
1. Fair value and non-fair value items are reported on the same line with fair value items parenthetically disclosed
2. Two separate lines for fair value and non-fair value
FAR
160
1. Valuation method and inputs used
2. Fair value at reporting date
3. Amount of Level 1, Level 2 and Level 3
4. Amount of transfers between Level 1 and Level 2 and why
5. Fair value of Level 3 and Level 3 gains/losses in realized and unrealized
6. Description of where Level 3 gains/losses are on the income statement or statement of OCI
7. Level 3 purchases, sales, and settlements
8. Transfers out of Level 3 and why
9. Gains/losses in earnings from unrealized and where those are in the income statement
10. Valuation techniques used for Level 2 and Level 3 with inputs used and the reason for any changes
FAR
161
1. Valuation method and inputs used
2. Fair value and reasons for fair value
3. Amount of Level 1, Level 2, and Level 3
4. Valuation techniques for Level 2 and Level 3 with inputs used and the reason for any changes
FAR
162
1. To estimate fair value
2. To estimate the difference between sets of future cash flows
3. To capture elements that would make up a market price
FAR
163
1. Estimate of future cash flow
2. Expectations of potential variation
3. Time value of money
4. Premium for inherent uncertainty
5. Liquidity and market imperfections
FAR
164
#NAME?
FAR
165
- Uses all expectations about possible cash flows instead of the most likely cash flow amount
- Only the time value of money is included in the discount rate
- The other 4 elements impact the estimated cash flow amount; allows present value to be measured w
FAR
166
The value at some date in the future if an amount earns interest for a period of time
FAR
167
The value today of some future specified amount if a specified interest rate were earned
FAR
168
The cumulative future value at the end of all periods if the same amount is deposited at the end of every period if interest is earned
FAR
169
The value today of a series of payments deposited at the end of each period and earning interest
FAR
170
- Single sum with payment now - FV of $1
- Single sum with future payment - PV of $1
- Series of payments with payment now - FV of annuity
- Series of payments with future payment - PV of annuity
FAR
171
- Interest earned on interest
- It often refers to the number of times interest on interest is calculated
- For example, "compounded monthly" means interest is added to the principal each month and interest for the next month is calculated on the new princip
FAR
172
#NAME?
FAR
173
Factor x Payment
FAR
174
(Future Value or Present Value) / Factor
FAR
175
(Future Value or Present Value) / Payment
FAR
176
Recorded at face value, not discounted
FAR
177
#NAME?
FAR
178
#NAME?
FAR
179
1. FMV of goods/services received
2. FMV of note
3. Discount using incremental borrowing rate
FAR
180
#NAME?
FAR
181
Costs incurred directly due to obtaining/giving a loan should be capitalized and amortized over the life of the loan
FAR
182
1. Total amount of notes
| 2. Amount of payments due by year for 5 years
FAR
183
Revenue is recognized, but cash has not yet been received
FAR
184
Expenses have been incurred, but have not yet been paid
FAR
185
Revenue is not recognized because it has not yet been earned, but cash has been received
FAR
186
Expenses have not been recognized because they have not yet been incurred, but cash has been paid
FAR
187
Revenues recorded when cash is received and expenses recorded when cash is paid
FAR
188
Journal entries must adjust balances from their current amounts to the correct amounts
FAR
189
```
Collections
+ Ending A/R
+ A/R write offs
- Beginning A/R
= Sales
```
FAR
190
```
Collections from other revenue
+ Beginning unearned revenue
+ Ending revenue receivable
- Ending unearned revenue
- Beginning revenue receivable
= Other revenue
```
FAR
191
```
Payments for purchases
+ Beginning inventory
+ Ending A/P
- Ending inventory
- Beginning A/P
=COGS
```
FAR
192
```
Payments for expenses
+ Beginning prepaid expenses
+ Ending accrued expenses payable
- Ending prepaid expenses
- Beginning accrued expenses payable
= Expenses
```
FAR
193
- Used only when collection of the sales price is not reasonably assured
- Revenue is recognized when cash is collected
- Gross profit is deferred to future periods and only recognized in proportion to collections
- Deferred gross profit is a contra-asset rep
FAR
194
#NAME?
FAR
195
#NAME?
FAR
196
- Revenue and profit are recognized during the construction period based on 2 things:
1. Total estimated profit, which is total estimated revenue minus total estimated cost
2. Percent complete based on costs incurred to date compared to total estimated cos
FAR
197
Profit Recognized in the Current Year = [(Actual Cost Incurred / Total Expected Cost) x Total Expected Profit] - Profit Previously Recognized
FAR
198
Always recognized when the company estimates a loss
FAR
199
#NAME?
FAR
200
Recognized as revenue by the franchiser only when substantial performance of the original service obligation is complete
FAR
201
Deferred until the related revenue is recognized
FAR
202
Need all 4:
1. Sale is made
2. Buyer's investments demonstrate a commitment to pay for the property
3. The seller's receivable is not subject to subordination
4. Risks and rewards have transferred to buyer without substantial continuing involvement of seller
FAR
203
Payments received are recorded as liabilities until a sale is complete or the deal is canceled
FAR
204
Seller recognizes only a portion of the profit at the time of sale and defers the remaining to future periods
FAR
205
- Exist when an entity sells multiple products or services to the same customer that are to be delivered at different times
- E.g. Sale of a car with an extended warranty
- 2 requirements to recognize revenue on each element separately:
1. The delivered item
FAR
206
Revenue associated with a substantive milestone is recognized upon completion of that milestone
FAR
207
An uncertain event with 3 criteria:
1. Payment is commensurate with the level of effort required to meet the milestone or the value created by completing the milestone
2. Relates only to past performance
3. Is reasonable compared to all other milestones
FAR
208
1. Description of the arrangement
2. Description of each milestone and related consideration
3. Determination of whether each milestone is substantive
4. Factors considered in deciding if milestones are substantive
5. Revenue recognized during the period under this method
FAR
209
Recognize revenue when all 4 are met:
1. Persuasive evidence of an arrangement exists (i.e. a contract)
2. Delivery has occurred
3. The fee is fixed or determinable
4. Collectibility is probable
FAR
210
Delivery has not occurred if there are undelivered elements essential to the functionality of the delivered item (i.e. the delivered item does not work as intended until later items are delivered)
FAR
211
Collectibility is not probable if the amount related to the delivered items is subject to refund or adjustment if undelivered elements are not delivered or if payment terms are longer than one year
FAR
212
Price charged when the item is sold separately or price established by management if the item is not yet sold separately provided that it is probable it will be sold separately in the future and the price will not change
FAR
213
VSOE is required to determine the amount of revenue to allocate to each element of the transaction
FAR
214
Defer revenue until one of the following things happen:
1. VSOE is established
2. All elements have been delivered
FAR
215
1. If post contract support (PCS) is the only undelivered element, recognize the entire fee ratably over the PCS period.
2. If services that don't require significant customization, modification or production are the only undelivered element, recognize the entire fee over the period the services are performed
3. If the entire arrangement is a subscription, recognize the entire fee ratably
4. If the only undelivered elements are additional copies of software that has already been delivered, recognize revenue on a copy-by-copy basis
FAR
216
```
Includes:
-Unrestricted cash
-Imprest funds (petty cash)
-Cash equivalents
Excludes:
-Cash that cannot be taken out of a foreign country for a certain time period (restricted cash)
-Cash designated for special uses (special funds)
-Unreimbursed expense vouchers
```
FAR
217
- Investments with original maturities of 3 months or less that are readily convertible to cash and close to maturity so the risk of interest rate changes is reduced
- They include treasury bills, commercial paper, money market funds, and certificates of de
FAR
218
#NAME?
FAR
219
#NAME?
FAR
220
#NAME?
FAR
221
#NAME?
FAR
222
Bank errors do not require adjustment in the company's books, but errors by the company do require adjustment
FAR
223
#NAME?
FAR
224
#NAME?
FAR
225
2 Methods:
1. If discounts taken are consistent year-to-year, recognize as expense when payment is received
2. If discounts taken are not consistent year -to-year, a receivables reserve can be established for the estimated amount of discounts, or sales can be recorded net of estimated discounts
- If discounts are not taken by the customer, the discount not taken is recognized as income
FAR
226
2 Methods:
1. Direct write-off - not acceptable for GAAP unless amounts are immaterial
- No expense is recognized until the receivable is written off
2. Allowance method - estimates the amount of A/R that is uncollectible at the time the receivable is recorded and sets up the Allowance for Bad Debts account, which is a contra asset account
- Bad debts are written off against the reserve, not against income
FAR
227
- Can be done either based on a percentage of sales or a percentage of the A/R balance
- When based on sales, the amount in the allowance account continues to build as sales happen - It only gets reduced by write-offs
- When based on the A/R balance, the am
FAR
228
Accounts Receivable - Allowance for Bad Debts
FAR
229
Net A/R does not change when receivables are written off because both A/R and the allowance are reduced
FAR
230
- Sales of various types of financial instruments
| - These sales are accounted for as either a sale or a loan collateralized by the financial instrument that was "sold"
FAR
231
- Results in de-recognition of asset by seller and recognition of asset by buyer
- To be accounted for as a sale, there are 5 conditions (need all):
1. The seller must give up control of the asset
2. The asset is untouchable by the seller or its creditors,
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Cash and other assets received less liabilities incurred
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1. The interest is proportionate ownership of an entire asset
2. All cash flows from the asset are divided proportionately based on shares of ownership
3. Each participant has equal priority in the event of bankruptcy
4. No participant is able to use the asset for collateral or to sell the asset unless all participants agree
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1. Allocate cost among participating interests based on relative fair values
2. Reduce the asset value by the cost associated with the interests sold (remaining asset is original carrying value less cost of interests sold)
3. Recognize assets obtained and liabilities incurred as part of the sale at fair value
4. Record the gain or loss on the sale in income in the period the sale occurred
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235
- If an asset transfer does not meet the criteria to be reported as a sale, it gets reported as debt by the seller and a loan receivable by the buyer
- The asset that was transferred remains on the transferor's balance sheet, but is shown as a pledged asset
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236
If the transferee has control of the asset, the transferee should record the asset at fair value and an associated liability for the obligation to return the asset
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237
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238
- Sales of accounts receivable at a discount so cash can be collected upon the sale of the receivable
- These sales transfer title to the A/R from the seller to the buyer
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239
The seller of the receivable has to repay the buyer if the end customer does not pay off the receivable
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240
The buyer of the receivable retains all risk of collection
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241
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242
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243
If actual experience differs from the estimate booked at the time a receivable is factored, those changes are Changes in Accounting Estimate impacting the current period income or expense, not prior periods
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244
Agreement where assets are sold to a lender with the requirement that the assets are later repurchased by the seller
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245
Transaction where a group of financial institutions buys a portion of a loan or loan portfolio
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246
A check that can be bought or sold
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247
#NAME?
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248
- Can only be accounted for separately as an asset or liability if it is contractually separated from the financial asset
- Servicing contracts are usually assets because the income from servicing is typically higher than the cost - income is "more than ade
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249
Measured based on the typical cost to service in the market
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250
#NAME?
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251
#NAME?
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252
1. Separate lines for fair value items and amortized items; or
2. Combine fair value items and amortized items but parenthetically show the fair value items
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253
1. Management's basis for determining categories
2. Description of risks
3. Hedging instruments used to offset fair value changes
4. Amount of contractual service fees, late fees and other fees
5. Qualitative and quantitative information used to determine fair value
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254
1. Beginning balance
2. Ending balance
3. Additions
4. Disposals
5. Changes in fair value assumptions
6. Changes in fair value
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255
1. Beginning balance
2. Ending balance
3. Additions
4. Disposals
5. Amortization
6. Valuation allowance
7. Changes in balance
8. Description of changes
9. Estimate of beginning and endin fair value
10. Activity for valuation allowance
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256
- Obligations that will be satisfied using current assets or by creating other current liabilities
- Examples:
1. A/P
2. Notes payable
3. Dividends payable
4. Accrued liabilities
5. Advances to customers
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257
#NAME?
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258
#NAME?
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259
#NAME?
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260
Future events are likely to occur
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261
#NAME?
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262
Collection of receivables, warranty claims, premiums offered to customers (i.e. coupons), litigation
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263
- Recorded based on history
- For example, history shows 2% of all products require warranty repairs or 1% of sales are ultimately uncollectible, so it is probable at the time of sale that a warranty obligation and bad debt exist and they are reasonably est
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264
If actual losses are different than estimated, it results in a loss recovery if the loss was less than recorded or incremental expense if it was more than recorded
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265
#NAME?
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266
#NAME?
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267
Accruals for employee vacation, sick pay, and personal days are required if the benefit is based on services already rendered, the benefits vest or accumulate, and payment is probable and reasonably estimable
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268
- Vacation is earned by employees at a rate of 1 day per month
- Unused vacation can be carried over to subsequent years
- An accrual of 1 day per month should be recorded for each employee at the end of each month because the service has already been render
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269
#NAME?
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270
Can be elected for commitments only involving financial instruments that otherwise would not be recognized until settlement
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Can be either debt or equity securities
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- Securities held by a company are reported as assets
- There are three categories:
1. Trading
2. Held-to-maturity
3. Available-for-sale
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273
- Classification for both debt and equity that the holder intends to sell in order to realize a profit
- Carried at FMV with changes (i.e. unrealized gains/losses) reported in income
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274
#NAME?
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275
- Classification for both debt and equity that do not qualify as trading or held-to-maturity
- Carried at FMV with changes (i.e. unrealized gains/losses) reported in OCI
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276
#NAME?
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277
Ownership interests or rights to obtain or dispose of ownership interests
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278
#NAME?
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279
#NAME?
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280
#NAME?
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281
Contra-asset account that may be used to record the fair value adjustments to investments rather than increasing or decreasing the investment account directly.
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282
- Equals the difference between the current carrying value of the investment and its current market value
- It is "unrealized" because the investment is still owned and has not yet been sold
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283
- Equals the difference between the sales price of the investment and the cost to purchase the securities
- It is "realized" because this represents the actual gain or loss once the investment is sold
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284
#NAME?
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285
Recorded at fair value with the unrealized gain/loss accounted for using the most conservative accounting method
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286
Unrealized gains/losses get recognized immediately
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287
#NAME?
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288
Unrealized gains and losses get recorded as OCI
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289
Unrealized gains and losses stay in OCI, but the OCI amount gets amortized over remaining life of debt
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290
- HTM and AFS securities need to be reviewed for impairment in each reporting period
- If fair value is less than the carrying value and that decline in value is "other than temporary," a loss equal to the amount of the decline is recognized in income and
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291
- Record the proportionate share of the investee's net assets on the investor's books in the investment account
- Changes in the investee's net assets (and consequently the investor's investment account) are recognized in income
- Used when the investor has
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292
#NAME?
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293
- Significant influence is presumed for investments of 20% or more, but it is possible to have an investment that large where the investor does not hold significant influence
- It is also possible to have an investment of less than 20% where the investor d
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294
- Occurs when an investor acquires significant influence on an investment that previously did not grant significant influence
- Typically, this is when an investor buys additional stock
- The change requires retroactive adjustment of investment, income, an
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295
#NAME?
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296
#NAME?
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297
#NAME?
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298
- Amount = Cost Basis of Stock * [Market Value of Stock Rights / (Market Value of Stock Rights + Market Value of Stock)]
- When stock rights are issued, the entry is to increase the investment in stock rights for the value based on the formula above and dec
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299
- Reported as a non-current asset unless the investor plans to cash in the policy within 12 months
- As insurance premiums are paid, the cash surrender value of the policy is increased, as calculated by the insurance company
FAR
300
#NAME?
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301
Record as inventory when title transfers.
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302
- Title passes to the buyer when it leaves the vendor.
| - Should be included in the buyer's inventory during shipment.
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303
- Title passes to the buyer when the buyer receives it.
| - Should be included in the seller's inventory during shipment.
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304
- Situation where one party becomes a sales agent for the owner of the inventory.
- Unsold items remain in the owner's inventory, not the sales agent's inventory even if the inventory is physically held by the sales agent.
- Revenue is recognized by the owne
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305
#NAME?
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306
Since overhead cannot be specifically attributed to individual units of inventory, it is allocated to inventory on a systemic and rational basis.
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307
#NAME?
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308
The hours or units expected under normal circumstances after reducing capacity for planned maintenance.
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309
#NAME?
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310
Expensed as incurred.
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311
Expensed as incurred.
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312
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313
#NAME?
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314
Real-time tracking of inventory units and cost.
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315
#NAME?
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316
Always taken against purchases.
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317
Formula: COGS = Beginning Inventory + Purchases - Ending Inventory
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318
At the lower of cost or market.
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319
#NAME?
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320
#NAME?
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321
#NAME?
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322
#NAME?
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323
#NAME?
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324
Once written down, no recovery is allowed if market values increase. Recovery only occurs when inventory is sold.
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325
1. Record inventory at market, forcing loss to COGS
| 2. Record inventory at cost and record write down separately
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326
3 types of inventory are not valued at LCM.
- Precious metals
- Commodity products
- Group purchases bundled together
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327
#NAME?
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328
-Valued at market if quoted market prices exist and the goods are interchangable (e.g. a pound of sugar).
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329
-Used for purchases of many different items that will be bundled together and sold as units where the cost of each unit is not known but the total, cumulative selling price for all units taken together is known (e.g. costs of real estate that will be sub-
FAR
330
#NAME?
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331
#NAME?
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332
Cost flow method that averages the cost of all units based on how many units are purchased at each cost.
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333
Cost flow method that averages only the unit cost without considering the quantity purchased.
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334
#NAME?
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335
#NAME?
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336
#NAME?
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337
#NAME?
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338
#NAME?
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339
#NAME?
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340
#NAME?
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341
#NAME?
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342
#NAME?
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343
#NAME?
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344
#NAME?
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345
- Method of calculating a LIFO index where the ending inventory is valued at both end of year prices and base year prices to arrive at the percentage change for the year as compared to the earliest year in the index.
- Formula: Index = Ending Inventory at Y
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346
Formula: LIFO Layer Value = Inventory at Base Year Price x Price Index in Effect When Layer Was Added
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347
- Method of calculating a single, cumulative LIFO index by sampling 50% - 75% of the items in a pool and valuing the sampled items by both the beginning of year and end of year prices.
- The index for the current year is multiplied by the prior year's cumul
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348
#NAME?
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349
When costs are increasing, FIFO results in higher inventory and lower COGS than LIFO.
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350
When costs are decreasing, FIFO results in lower inventory and higher COGS than LIFO.
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351
#NAME?
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352
Formula: Gross Margin Percentage on Sales = Gross Margin Percentage on Cost / (1 + Gross Margin Percentage on Cost)
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353
Formula: Gross Margin Percentage on Cost = Gross Margin Percentage on Sales / (1 - Gross Margin Percentage on Sales)
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354
#NAME?
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355
#NAME?
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356
1. Gross profit
2. Standard cost
3. Direct cost
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357
Market value declines below contract value are recorded as losses.
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358
When title transfers.
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359
#NAME?
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360
#NAME?
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361
- Tangible items that will have a useful life of more than 12 months
- Items like land, buildings and equipment
- Valued at historical cost except for held for sale assets and impairments
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362
To record as an asset on the balance sheet
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363
Costs to acquire and prepare the asset for use, including freight, installation, taxes, fees, interest, etc.
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364
Include labor and overhead
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365
Record at FMV by debiting fixed assets and crediting income
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366
If there are costs associated with disposing of the asset at the end of its useful life, the liability should be recorded as a debit to the asset and a credit to the liability account at present value
FAR
367
#NAME?
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368
The rate on debt specific to the asset under construction or the weighted average rate on other borrowings if less than 100% of specific debt was incurred
FAR
369
Need all 3:
1. Costs have been incurred
2. Activities to complete the asset are in process
3. Interest cost is being incurred
FAR
370
Any funds earning interest revenue cannot be offset against interest expense
FAR
371
- Swap of assets with a 3rd party
- Recorded at FMV if the exchange has commercial substance and is not related to inventory sales
- If the FMV of the asset given cannot be determined, FMV of the asset received is used for both assets
- If the FMV of neither
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372
#NAME?
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373
Always recognized
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374
Only recognized if FMV is determinable or boot is received
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375
Extra cash given in a non-monetary exchange
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376
- If the FMV of the asset given is known, boot is added to the capitalized cost of the asset received, not added to the loss
- If the FMV of the asset given is not known, but FMV of the asset received is known, boot is added to the loss
- If the transact
FAR
377
Need all 3:
1. FMV is higher than NBV given up
2. Boot is received
3. Exchange lacks commercial substance
- Earnings process is complete for boot portion but not exchange portion resulting in partial gain
FAR
378
(Boot Received / Total FMV Received) x Total Gain
FAR
379
When buying a group of assets for one price, allocate the cost to each asset based on the relative FMVs
FAR
380
#NAME?
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381
#NAME?
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382
Match the expense of fixed assets with the periods in which the revenues/benefits are realized
FAR
383
Asset Cost - Salvage Value
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384
The same amount of depreciation expense is booked each year for the asset until salvage value is reached
FAR
385
Depreciation Base / Useful Life
FAR
386
#NAME?
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387
(1 / Useful Life) x 2 x NBV
FAR
388
- Accelerated deprecation method where depreciation is higher in early years than straight-line. To get the denominator, add up all the numbers up to the useful life.
- For example, if the useful life is 6 years, the denominator is 21 (= 6+5+4+3+2+1)
- In
FAR
389
Based on activity or units produced
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390
(Activity In The Period/Total Estimated Activity) x Depreciation Base
FAR
391
Used when assets lose more value early in life (e.g. a car), are used more when they are new or become more expensive to maintain as they get older
FAR
392
#NAME?
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393
Beginning Cost + Cost Added - Ending Value Counted
FAR
394
Uses the average life for several similar assets
FAR
395
#NAME?
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396
Annual Straight-Line Depreciation / Asset Cost
FAR
397
Depreciation Rate / Annual Straight-Line Depreciation
FAR
398
#NAME?
FAR
399
Depreciation is recorded up until the date of disposal
FAR
400
- Reported at the lower of carrying value or FMV less cost to sell
- This pulls forward some or all of the loss prior to actual sale
- 1 of 3 exceptions to reporting fixed assets at historical cost
- Previous write downs can be reversed if FMV recovers
- HFS a
FAR
401
Need all 6:
1. Management commits to a disposal plan
2. Assets are available for sale
3. An active program to find a buyer has started
4. The sale is probable within 12 months
5. The sale price approximates FMV
6. It is unlikely the plan will change
FAR
402
- Impairment losses are recognized when both are true:
1. FMV of a group of fixed assets is less than NBV
2. NBV is higher than estimated undiscounted future cash flows
- 1 of 3 exceptions to reporting fixed assets at historical cost
FAR
403
Assume the highest and best use of the assets
FAR
404
FMV - NBV
FAR
405
#NAME?
FAR
406
#NAME?
FAR
407
Total cost of the asset (drilling, boring, digging, etc.)
FAR
408
(Units Extracted / Total Expected Units) x Depletion Base
FAR
409
#NAME?
FAR
410
Patents, trademarks, customer lists, trade names, etc.
FAR
411
Recorded at cost
FAR
412
Expensed as research and development
FAR
413
Recorded as part of a business combination and allocated to reporting units
FAR
414
- Intangibles with definite lives are amortized in line with how they are used (usually straight-line)
- Amortization reduces the asset directly
- No contra-account is used
- Indefinite lived assets are not amortized
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415
#NAME?
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416
FMV - Carrying Value
FAR
417
- Conducted at least annually at the same time each year
- There are 2 steps:
1. Determine if the carrying value of the reporting unit exceeds FMV - this step can be the same as the prior year if no changes have occurred and FMV was much higher than the c
FAR
418
Costs for a new facility, product line or similar item are expensed as incurred
FAR
419
Expensed as incurred
FAR
420
Capitalized and amortized
FAR
421
If there is an alternate use for the asset aside from R&D, it is capitalized and depreciated
FAR
422
Costs may be deferred to match revenues
FAR
423
- Costs prior to achieving technological feasibility are expensed as R&D
- After technological feasibility, costs are capitalized until software is available for release
- After release, duplication and packaging costs are inventory and support costs are exp
FAR
424
Expense is the higher of:
(Current Revenue / Total Revenue) x Cost
or
Cost / Useful Life
FAR
425
- Designed to meet an entity's needs with no plans to sell
- To capitalize costs, it must be probable the software will be used and must be past the conceptual formulation and design phase
- If not, it is R&D expense
FAR
426
Substantially all of an entity's activities are for starting a new business, operations have not started or there is no significant revenue
FAR
427
No special rules
FAR
428
#NAME?
FAR
429
#NAME?
FAR
430
Controlling financial interest through ownership of 50% or more of the voting shares or through other means
FAR
431
Business that is being acquired
FAR
432
Entity that is gaining control of another business
FAR
433
Date control is obtained, typically when cash is paid or equity is exchanged and assets/liabilities are assumed
FAR
434
Assets and liabilities are measured at FMV on the acquisition date
FAR
435
#NAME?
FAR
436
#NAME?
FAR
437
4 step process for all business combinations
1. Identify acquirer
2. Determine acquisition date
3. Recognize identifiable assets acquired, liabilities assumed and noncontrolling interest in acquiree
4. Recognize goodwill or a gain
FAR
438
1. Entity with the highest voting percentage
2. Entity with the most people on the Board of Directors or in senior management
3. Entity that pays a premium
4. Entity that has the most assets, revenue or income
FAR
439
Arise from contractual or legal rights or are separable
FAR
440
Can be separated or divided and sold or transferred.
FAR
441
#NAME?
FAR
442
#NAME?
FAR
443
Terms that are favorable or unfavorable to market rates are an asset or liability that must be recognized at FMV on the acquisition date
FAR
444
Recognized at FMV
FAR
445
#NAME?
FAR
446
Any equity the acquirer previously held in acquiree gets revalued to FMV
FAR
447
#NAME?
FAR
448
Discount received in a business combination (i.e. the FMV of net assets purchased is more than the purchase price)
FAR
449
FMV Transferred + FMV of Previously Held Equity + FMV of Noncontrolling Interest - FMV of Net Identified Assets
FAR
450
If the acquirer retains control of assets transferred, the assets are transferred at carrying value, not FMV
FAR
451
- FMV of contingent consideration is part of the price paid to acquire a business
- Any change in the FMV within 1 year of the acquisition date is charged to goodwill
- After 1 year, changes to FMV for contingent consideration that is carried as an asset or
FAR
452
- When an acquirer buys less than 50% of a business, then subsequently makes another investment to acquire a majority stake
- Any previously held shares are restated to FMV and a gain or loss is recognized
- If changes in FMV were previously recognized in OC
FAR
453
#NAME?
FAR
454
#NAME?
FAR
455
Market Price x Number of Shares
FAR
456
#NAME?
FAR
457
Keep the same classification (operating or capital) as accounted for by the acquiree unless the lease is modified as part of the business combination
FAR
458
#NAME?
FAR
459
Entities in which control may be achieved based on contracts, ownership or other interests that may vary with changes in net asset values (variable interests)
FAR
460
Performed at inception and reassessed as the relationship changes
FAR
461
- The primary beneficiary has to consolidate the VIE
- The primary beneficiary has both of the following:
1. The power to direct the activities of the VIE that are most significant to the economic performance
2. The obligation to absorb losses of or the rig
FAR
462
#NAME?
FAR
463
#NAME?
FAR
464
The primary beneficiary records the assets of the VIE that are assigned to settle liabilities of the VIE and liabilities of the VIE that creditors cannot collect from the primary beneficiary
FAR
465
1. Carrying amounts and classifications of VIE assets and liabilities
2. Lack of recourse by creditors against primary beneficiary
3. Terms of agreements
FAR
466
1. Carrying amounts and classification of VIE assets and liabilities
2. Maximum exposure to loss
3. Comparison of carrying amounts of assets and liabilities to exposure to loss
4. Liquidity arrangements, guarantees or commitments by 3rd parties that impact value or risk
5. Factors considered in determining the primary beneficiary
FAR
467
1. Methodology to determine primary beneficiary
2. Changes related to consolidation / non-consolidation decision
3. Whether non-contractually required financial support was provided
4. Nature, purpose, size and activities of the VIE
5. How the VIE is financed
FAR
468
- Consolidation indicates the resources of 2 or more companies is actually under the control of 1 entity
- Transactions between the 2 or more companies are eliminated
FAR
469
#NAME?
FAR
470
1. Eliminate transactions between acquirer and acquiree
2. Eliminate investment in acquirees stock against acquiree equity (equity remaining should only be acquirer equity)
3. Add step ups to assets to get from carrying value to fair value
4. Establish goodwill
FAR
471
#NAME?
FAR
472
- Selling inventory between acquirer and aqcuiree
- If the intercompany sale is made at a profit to either acquirer or acquiree and the inventory remains with the purchaser at period end (i.e. it is not sold to a 3rd party), there is intercompany profit th
FAR
473
- Seller COGS + Incremental Purchaser COGS on 3rd Party Sales
- Example – Company A sells $100 of inventory to Company B
- Company B adds $20 of material to the inventory purchased from Company A
- When that inventory is sold, total COGS for the combined co
FAR
474
#NAME?
FAR
475
- Eliminations when bonds are bought/sold between acquirer and acquiree
- Accounts to be eliminated:
- Bond asset
- Bond payable
- Interest income
- Interest expense
- Interest payable
- Interest receivable
FAR
476
- Recognized when already outstanding bonds are purchased from a 3rd party for an amount that is different than the carrying value of the issue
- It is still a liability for the issuer and an investment for the purchaser
- Example - Company A issues bonds t
FAR
477
Added together and shown as adjustments to retained earnings
FAR
478
Shows all revenues and expenses of acquiree
FAR
479
Shown separately as a deduction in the income statement
FAR
480
Shown as a reduction of NCI in equity
FAR
481
Allocated to NCI if FMV of consideration from NCI is different than the FMV of net assets acquired
FAR
482
Never recognized on NCI
FAR
483
FMV of NCI + NCI Net Income - NCI Dividends
FAR
484
- Special section on the consolidation worksheet shown in all parts
- Net income from Section 1 flows down to retained earnings in Section 2
- Ending retained earnings in Section 2 flows down to retained earnings in Section 3 for all columns
FAR
485
- Acquirer has 1 year from acquisition date to obtain complete information to accurately value assets and liabilities acquired
- At acquisition date, asset and liability amounts are estimated if information is not available
- Within 1 year, adjustments to es
FAR
486
Only occurs when the contingency is resolved
FAR
487
- When the acquirer replaces options/restricted stock grants of the acquiree upon acquisition, there are 2 treatments
- If replacement is required by acquirer, include in deal consideration
- If replacement is voluntary, recognize the FMV as compensation cos
FAR
488
Typically measured at FMV on the acquisition date
FAR
489
#NAME?
FAR
490
#NAME?
FAR
491
- Reporting the acquiree's financial statements at FMV
- Required by the SEC for large subsidiaries that are at least 90% owned
- Adjustments to state assets and liabilities at FMV are made directly on the acquiree's books
- No change in the consolidated fina
FAR
492
Mature on one date
FAR
493
Mature in groups over a series of dates
FAR
494
#NAME?
FAR
495
#NAME?
FAR
496
If the fair value option is not elected, record at issue price and use the effective interest method to amortize the premium or discount
FAR
497
If FMV is impacted by this risk, disclose potential gains and losses due to credit risk
FAR
498
2 Components to add together
1. Present value of the face value of the bond (PV of $1)
2. Present value of the stream of interest payments (PV of annuity)
FAR
499
- If more than annual compounding, multiply periods by the number of times per period and divide the interest rate by the number of times per period
- For example, if there is a $1,000 bond paying interest monthly at 12% for 2 years, the number of periods
FAR
500
#NAME?
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