Definitions

Question 1

What is included in Comprehensive Income?

Answer 1

CI = periodic change in equity from nonowners sources. It includes broadly: Revenues, Exps, gains, losses as part or Net Income but also holding gains from AFS securities and FOREX translation adjs. Hence, intermediate comps of Net Income like Gross Margin, EBITA and operating income are included.
However, items of OCI (emphasis on the O because is the category inside CI) include, among others:
1) gains and losses on derivatives designated and qualifying as cash flow hedges;
2) foreign currency translation gains and losses; and
3) unrealized holding loss on available-for-sale debt securities.

Question 2

When to use Present Value measurement? (1.5)

Answer 2

When there are uncertainties in risks, typically for LT receivables and payables NOT INVENTORY. Requirements are:

1. Estimates of future cash flows,
2. Expected variability of their amount and timing,
3. The time value of money (risk-free interest rate),
4. The price of uncertainty inherent in an asset or liability, and
5. Liquidity or market imperfections.

Question 3

What are the types of Error corrections and how are they reported?

Answer 3

Prior year corrections = adjustments the Ret. Earnings net of tax. ERRORS include:
Math mistakes, mistakes applying principle and misuse of existing facts at prior preparation.

Reporting entity changes = RETRO by (1) presenting consolidated or combined F/S in place of individuals, (2) updating the specific subs included in presentation and (3) updating the entities includes in combined F/S

Question 4

What are the types of Accounting CHANGES and how are they accounted for?

Answer 4

Changes:
1 - Accounting Principle = Retro
2- Accounting Estimate = Prospective, even when inseparable from principle. eg. method of depreciation, amortization.
3- Reporting Entity = Consolidated or combined F/S retro and NOTES disclosures
–
EROR Corrections = Single-period statments as adjus. of opening Bal of RETAINED Earnings.

Question 5

How to correct for improperly expensing assets that should have been depreciated over a period of time?

Answer 5

First, realize that by expensing the assets prematurely, the co. underpaid taxes because it lowered Net Income in the first year.

2) Missing the depreciation expenses for years 1 - 2 or more resulted in a tax overstatement = [(Purchase price - Salvage)/Life of asset] * tax rate.
3) The prior period adj is typically a net understatement of (1)-(2) because the expense of the first year (under NI) was GREATER than the overstatement of NI on years 2 and 3. As you would expect from a slower depreciation of the asset.

Question 6

What are the components of Equity?

Answer 6

Stock @ par
Retained earnings
AOCI
Non controlling interest on affiliated companies

Question 7

How are changes in acct. principle and acct. estimate reported differently?

Answer 7

A change in the estimated lives of depreciable assets is a change in accounting ESTIMATE that should be accounted for on a PROSPECTIVE basis. A change in accounting estimate thus should be reported in the period of change as well as in future periods if the change affects those future periods. If the change affects more than one future period, required disclosures are the effect on (1) income from continuing operations, (2) net income (or other appropriate captions), and (3) any related per-share amounts for the current period.

A change from an accounting PRINCIPLE that is not generally accepted to one that is generally accepted is a correction of an ERROR. It should be reflected by restatement of prior period statements presented comparatively or by an adjustment (NET OF TAX) to the opening balance of retained earnings in single period statements.

Question 8

What’s the difference between BEPS and DEPS? (SU3.5)

Answer 8

Basic Earnings PS = (Net Income - Pref St Dividends) / WAVG Common Stock Outstanding

DEPS = BEPS Numerator + Effect of dilutive Potential Common Shares / BEPS + Effect of dilutive PCS.

Dilutive PCS are reductions in BEPS coming from: (1)Convertible Securities, (2) Options, warrants potentially excercised, or (3) Contingently issuable common shares

Question 9

For Long term contracts using the input method, how do you calculate annual revenue?

Answer 9

For YR1, Revenue = YR1 / Total cost = % of completion. % of Completion * Contract value = Revenue
For YR2, Revenue = Cumm Cost / Total expected cost = %; (% * Contract Value) - prev. recognized Rev. = Rev YR2

Question 10

When do you report on a segment?

Answer 10

It must meet 1 or + of the following quantitative thresholds:

(1) Reported revenue, including sales to external customers and intersegment sales or transfers, is at least 10% of the combined revenue (external and internal) of all operating segments;
(2) its assets are at least 10% of the combined assets of all operating segments; or
(3) reported profit or loss is at least 10% of the greater (in absolute amount) of the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss.

Question 11

What are “input” Levels for Fair Value Measurements? (SU4)

Answer 11

1 = Most Reliable = Unadjusted quoted prices for identical in active markets at the measurement date
2 = Observable = Quotes prices for similar items
3 = Least reliable = the reporting entity's own data.

Question 12

Can a company record interim gains on FVM temporary recoveries?

Answer 12

NO. The key part is the temporary nature.
A market decline reasonably expected to be restored within the fiscal year may be deferred at an interim reporting date because no loss is anticipated for the year. Because Wilson expected the first quarter loss to be temporary, it did not recognize the loss in the interim statements. Recoveries of market value may only be recognized to the extent of previous losses, so no gain was recognized in the third quarter.

Question 13

For geographic areas, what info is reported?

Answer 13

The following information about geographic areas is reported if feasible:

(1) external revenues attributed to the home country,
(2) external revenues attributed to all foreign countries,
(3) material external revenues attributed to an individual foreign country,
(4) the basis for attributing revenues from external customers, and
(5) certain information about assets.

Question 14

How are investments remeasured under the FVO method?

Answer 14

Under FVO, the recipient records earnings or losses from Dividends received and unrealized gain and losses.

Question 15

Most financial assets and liabilities can be reported using the Fair Value Option (FVO), except for:

Answer 15

1- Employee pension plans (they have their own F/S)
2- Other postretirement employee benefits
3- Post employment benefits
4- EE stock options and purchase plans
5- other deferred compensation

Question 16

What is the alternative to FVO and when to use it?

Answer 16

An investment in equity securities that does not result in control or significant influence over the investee is measured at fair value through net income. However, an entity may elect the measurement alternative for an investment in equity securities without a readily determinable fair value.
This alternative is cost minus impairment (if any), plus or minus changes resulting from observable price changes for the identical or a similar investment of the same issuer.

Question 17

When to use the Equity method instead of FVO?

Answer 17

When the investment on Common Stock securities =>20%-50%.
The investor claims that percentage of Net income from the investee. The investor’s share of the investee’s income is a function of % of ownership and the length of time the investment was held.

Dividends DO NOT affect income under the EQUITY METHOD. Dividends from the investee are treated as a return of an investment. They DECREASE the investment BALANCE but have NO effect on the investor’s Income.

Question 18

Accrued interest receivable is ALWaYS = to

Answer 18

The face amount times the nominal interest rate

Question 19

For notes receivable, how to calculate interest income?

Answer 19

Interest income = PV of note * prevailing % rate

Pv is typically the Carrying value times a factor for Number of periods (NoT FACE VALUE)

Face value is used for accrued interest receivable (B/S) not interest income (I/S)

Question 20

For Dividends paid, there are 2 methods of accounting Equity and FVO, what’s the difference?

Answer 20

FVO = dividends from an investment in equity securities should be accounted for by the investor as dividend income unless a liquidating dividend is received. Thus, assuming that the dividend is not liquidating, it has NO EFFECT ON THE INVESTMENT BAL.

EQUITY method, the investor recognizes its equity in the undistributed earnings of the investee. Consequently, cash dividends DECREASE the investment balance because the dividend is considered to be a return of investment.

Question 21

Bond mechanics: Effective interest rate vs. Straight line

Answer 21

When a bond is purchased at a premium, its initial carrying amount > the maturity amount. The carrying amount of a bond acquired at a premium will decrease over time as the premium is amortized.

Under the straight-line method of amortization, equal amounts are amortized over the life of the bond. Accordingly, the least amount of premium will be amortized in the first year under the interest method, and the result will be the highest carrying amount of the bond at the end of this year.

Under the effective interest method, interest revenue = to the carrying amount of the bond at the beginning of the interest period multiplied by the yield. The amount of periodic amortization is the excess of the nominal interest received over the interest revenue. Because the carrying amount of the bond will decrease over time, the amount of interest revenue will also diminish. Subtracting the decreasing interest revenue from the constant periodic cash flow results in increasing amounts of premium amortization over the term of the bond.

Question 22

FOB Destination is more beneficial to the customer, why?

Answer 22

FOB destination means that title passes upon delivery at the destination, the seller bears the risk of loss during transit, and the seller is responsible for the expense of delivering the goods to the designated point. Consequently, the packaging, shipping, and handling costs are not included in the buyer’s inventory

Question 23

For Consignment sales, what is excluded from inventory @ B/S date?

Answer 23

Exclude for inventory on consignment:

• Advertising = expensed when incurred
• Commissions = selling expenses (P/L)

HOWEVER, the CONSIGNOR must include shipping charges to deliver goods to consignee as part of COGS (B/S)

Question 24

What costs are included / excluded for inventory?

Answer 24

Include: 
Returns from customers, 
freight-in to the warehouse, 
sales tax on raw materials and 
insurance in transit.

EXCLUDE:
Shipping to customers (selling expense) and Interest on financing (interest Expense)

Question 25

Inventory Equation

Answer 25

Goods Avail. for Sale = Beg Inv. + purchases

COGS = GAVS - End Inventory

Question 26

What do you report on each operating segment (>10% of Rev & >10% Assets)?

Answer 26

The:
1- Profit or loss
2- Total assets
Note: Operating results are regularly reviewed by CEO

Question 27

Name the required disclosures concerning risks and uncertainties on the nature of operations.

Answer 27

One set of disclosures concerns risks and uncertainties relating to the nature of operations.
(1) major products or services,
(2) principal markets, and
(3) the locations of those markets.
The company must disclose its major products. They also should disclose (1) all industries in which they operate; (2) the relative importance of each; and (3) the basis for determining the relative importance.

Question 28

For PPE, when damaged are identifiable and refurbished, how does the SUBSTITUTION method of acct. works?

Answer 28

The asset account and accumulated depreciation should be reduced by the appropriate amounts, and a gain or loss should be recognized.

In this instance, the damages were uninsured, and a loss equal to the carrying amount of the damaged portion of the building should be recognized. In addition, the cost of refurbishing should be capitalized in the asset account.

Question 29

For PPE, when testing for Impairments what do we compare?

Answer 29

The test for impairment involves comparing the carrying amount with the fair value of the asset

Question 30

For PPE, testing for IMPAIRMENT compares…

Answer 30

Carrying amount of the asset and the undiscounted future cash flows expected to be generated by the asset.

A long-lived asset (asset group) is impaired when its carrying amount > fair value.

However, a loss equal to this excess is recognized for the impairment only when the carrying amount is not recoverable. The carrying amount is not recoverable when it exceeds the sum of the undiscounted cash flows expected from the use and disposition of the asset (asset group).

Question 31

when should reinstallation costs be capitalized?

Answer 31

Costs that significantly improve the future service potential of an asset by increasing the quality or quantity of its output should be capitalized even though the machine’s useful life is not extended.

Question 32

For non monetary exchanges of goods held for sale, how should the gain/losses be calculated?

Answer 32

a nonmonetary exchange that should be measured at the fair value of the assets given up. Iona should record a gain equal to the difference between the fair value (the same for both assets) and the cost (carrying amount) of the asset surrendered.

Question 33

For Copyrights and patents, over what period should they be amortized against the capitalized amount?

Answer 33

Amortizations should the shorter of the legal or useful life

Question 34

Are Goodwill or Trademarks amortizable?

Answer 34

Goodwill is tested for impairment at least annually but is NEVER amortized.
Trademarks, however, may be amortized but only if they have finite useful lives.

Question 35

Testing for Goodwill impairment with other units

Answer 35

If goodwill and another asset group of a reporting unit are tested for impairment simultaneously, the other asset group must be tested for impairment before goodwill. If the asset group was impaired, the impairment loss would be recognized prior to goodwill being tested for impairment.

Question 36

How to account for R&D costs?

Answer 36

EXPENSE them.
R&D costs must be expensed as incurred. But this rule does not apply to
(1) R&D conducted for others or
(2) the costs of
(a) intangible assets purchased from others,
(b) materials,
(c) equipment, and
(d) facilities acquired or constructed for R&D but having alternative future uses. It also does not apply to R&D assets acquired in a business combination.

Question 37

How to account for Computer Software?

Answer 37

Accounting for the costs of developing or obtaining computer software depends on whether the software is (1) sold to external customers or (2) used internally.
The costs of software to be marketed may be expensed as incurred, capitalized as computer software costs, or included in inventory. For computer software products (intended to be sold to external customers), costs incurred before technological feasibility is established (coding, testing, etc.) are expensed as incurred. Costs incurred after technological feasibility is established are capitalized as computer software costs. Technological feasibility is established when either a detailed program design is complete or the entity has created a working model. Costs incurred to prepare the product for sale (duplication of software, training materials, packaging) are capitalized as inventory. Costs for coding and testing and for the completion of detailed program design are incurred before technological feasibility is established. They should thus be expensed as incurred. The other coding and testing costs ($44,000) after establishing technological feasibility, but not for preparing the product for sale, should be capitalized as computer software costs.