CRAM W3 Flashcards
What are the methods available to account for a sub that is consolidated?
The investment will either be accounted for by cost or equity method and must be fully eliminated in the consolidation.
When a range of possible losses is provided for a contingent liability, what is the amount recorded in the Balance Sheet?
When an estimate of probable loss is more likely than others in the range, that amount is accrued in the FS. If all amounts in the range are equally probable, the lowest amount should be accrued.
When should a gain contingency be recorded?
Material gain contingencies should be footnoted, but never recorded in the FS.
How does a contingent liability for warranty work?
The recognized warranty expense and liability are recorded at the time of sales because the warranty is part of the sales effort. As warranty repairs are performed, the liability is reduced.
If a contingent liability is reasonably possible, and the amount can be definitely determined, how is the item recorded in the FS?
If an event is reasonably possible, the amount (even if definitely determined) is only required to be included in a footnote disclosure.
How many EPS figures are reported in the FS? Which of these is most important to an investor?
- Income from Continuing Ops
- Net Income
- Discontinued Ops
- Extraordinary Items
EPS for continuing income is most important to an investor-that is the income before extraordinary items and discontinued ops.
What is a key requirement of a discontinued operation?
In order to qualify as a discontinued operation, the component to be disposed must be approved for sale and represent a strategic shift in operations.
Can a loss on discontinued operations be recognized in a period before the sale occurs?
Yes; if a sale is to be made after period end, estimated disposal losses are recognized. This is not the estimated loss on the discontinued operation, itself, but rather the loss on the disposal transaction.
How are financial derivatives reported in the FS?
The asset or liability must be reported at FV. Changes in FV are recognized in the income for the period of the change.
How is a hedge that is used to offset risk of loss on a recognized asset or liability reported?
Management’s discretion: either reported as a cash flow hedge or FV hedge.
*If the risk of loss pertains to changes in exchange rates, the item is a cash flow hedge.
For Forward Contracts that are entered into for speculative purposes, what rates will be used to measure the contract(s)?
The forward rate is always used - spot rate is never applicable to a Fwd Contract.
In contrast to hedge contracts, Fwd Contracts are recorded and valued at the contract date and subsequently measured for G/L based on the forward rates at those measurement dates.
In order to determine a foreign sub’s functional currency, what must be considered?
- The extent to which the sub operates, and generates and expends cash in the local foreign economy where it’s located
- Cumulative inflation rate where it’s located
What constitutes a highly inflationary economy?
Cumulative inflation of 100% or more for 3+ years
What is the difference between the recording and reporting currency of an entity?
The recording currency is the currency that all of the entity’s transactions are recorded in, and the reporting currency reflects the currency that the ‘end-all’ FS are reported in - if the entity is wholly owned by a parent, that would be the parent’s currency since the sub’s FS are ultimately consolidated and remeasured.
Where are Translation G/L and Remeasurement G/L reported?
Translation G/L are reported in OCI, and Remeasurement G/L are included in current income.
If the functional currency of an entity is its local currency, what conversion method is used for the FS?
The Income Statement would be converted using translation at the weighted average exchange rates for the year. Sales should be converted using the rate in place at the time of sale or the weighted average rate.
Balance Sheet: Assets and liabilities are converted using the spot rate @ YE. PIC accounts are translated using the historic rate at time of origination.
What account is not translated using an exchange rate?
Retained Earnings is determined based upon BB + converted income - converted dividends declared = EB in dollars.
What is the difference between remeasurement and translation?
Remeasurement is required when an entity is reporting in a currency that is not its functional currency.
Translation is required in order to consolidate into FS in US Dollar.
With regard to interim reporting, how are maintenance expenses recorded?
If the problem states that the repairs will benefit operations for a specific period, the expense should be recognized equally over that period. IE, if paid in 2nd quarter and benefits the year, only 1/3 of the expense is accrued in Q2 interim FS.
Should a planned volume variance be deferred at the end of a quarter if it is expected to be absorbed in the quarter to follow?
Yes; whether the variance is expected to be favorable or unfavorable, if the expected annual net effect is 0, the entire amount will be deferred at interim dates.
What are the 4 criteria of a capital lease?
- Lease term is 75% of Useful Life
- PV of MLP’s > 90% of FV
- Title Transfer
- Lease contains BPO
