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Question 1

What are the ingredients of faithful representation?

Answer 1

1. Completeness
2. Neutrality
3. Freedom from error

Question 2

What are the ingredients of relevance?

Answer 2

1. Predictive value
2. Confirming value
3. Materiality

Question 3

What is realization according to the FASB Conceptual Framework?

Answer 3

Revenues and gains are realized when assets are exchanged for cash or claims to cash.

Question 4

How should changes in accounting principle be reported in financial statements?

Answer 4

Beginning retained earnings in the earliest period presented should be adjusted to reflect the cumulative effect of the change in accounting principle.

Question 5

What are the criteria for reporting an extraordinary loss on the income statement?

Answer 5

1. unusual in nature
2. infrequent in occurrence
3. reported net of tax
4. separate line item after discontinued operations

Question 6

For purposes of discontinued operations, what is a “component” of an entity?

Answer 6

1. operating segment (as in segment reporting)
2. reportable segment (as in segment reporting)
3. reporting unit (as in goodwill impairment testing)
4. subsidiary
5. asset group (including liabilities associated with the assets)

Question 7

When is a component classified as held for sale?

Answer 7

1. management commits to sell the component
2. component is available for immediate sale as is
3. seller is actively seeking a buyer
4. sale is probable and expected within a year
5. plan to sell is unlikely to change

Question 8

When are a component’s results of operations classified as discontinued operations?

Answer 8

When the component has either 1) been disposed of or 2) is held for sale.

Question 9

Which periods does a change in accounting estimate affect?

Answer 9

The change is prospective–it affects only the current period and future periods. It does not affect past periods or retained earnings.

Question 10

How should a change in depreciation method be presented on the financial statements?

Answer 10

A change in depreciation method is a change in estimate and is therefore handled prospectively. Starting in the year of change, depreciation expense should be calculated by applying the new method to the current book value of the underlying asset. No changes should be made to past periods or retained earnings.

Question 11

What are the criteria for recognizing a liability for future exit or disposal plans?

Answer 11

1. An obligating event has occurred.
2. The entity has a present obligation to transfer assets or provide services in the future.
3. The entity doesn’t have discretion to avoid the future transfer of assets or provision of services.

Question 12

What is comprehensive income?

Answer 12

The change in equity during a period resulting from transactions with non-owners. It doesn’t include contributions from or distributions to owners.

Comprehensive income = net income + other comprehensive income

Question 13

What does the PUFER acronym signify?

Answer 13

PUFER stands for the components of Other Comprehensive Income.

Pension adjustments
Unrealized gains and losses (available-for-sale securities only)
Foreign currency items (e.g. translations)
Effective portion of cash flow hedges
Revaluation surplus (IFRS only)

Question 14

What does the IDEA acronym signify?

Answer 14

IDEA indicates the sequence in which other income items follows income from continuing operations.

Interest income
Discontinued operations income
Extraordinary income
Accounting changes (reported on statement of retained earnings, not income statement)

Question 15

Must the income tax expenses or benefits allocated to the components of comprehensive income be reported anywhere?

Answer 15

Yes. They are reported on the face of, or in notes to, the statement of comprehensive income or the statement of changes to owners’ equity.

Question 16

How do you calculate estimated income tax expense for an interim income statement in the second, third, or fourth quarter?

Answer 16

1. Add net income before taxes in the current quarter to net income before taxes in all previous quarters to get year-to-date net income before taxes.
2. Multiply year-to-date net income before taxes by the estimated effective annual income tax rate as of the current quarter to get year-to-date income tax expense.
3. Subtract income tax expense in the previous quarters from year-to-date income tax expense to get income tax expense for the current quarter.

Question 17

What are the criteria for an operating segment to be reportable?

Answer 17

The segment has at least 10% of any of the following:

• total combined revenue of all segments (including inter-segment sales)
• the greater of 1) total operating profit of segments that reported a profit or 2) total operating loss of segments that reported a loss (on an absolute basis)
• total assets of all segments

If total consolidated revenue of all operating segments is less than 75% of the company’s total consolidated revenue, other segments must be identified even if they don’t meet the above criteria. Additional segments must be identified until total consolidated revenue of all operating segments is 75% or more of the company’s total consolidated revenue.

Information about segments that don’t meet the above criteria should be combined in an “all other segments” category.

Question 18

How are segments’ sales to unaffiliated parties and to other segments disclosed in the financial statements?

Answer 18

Sales to unaffiliated parties and sales to other segments must be reported separately in the financial statements.

Question 19

How do you calculate the operating profit of a segment for disclosure in financial statements?

Answer 19

A segment’s operating profit is whatever measure of profit it reports to the Chief Operating Decision Maker (CODM). It includes sales to other segments, sales to unaffiliated parties, and expenses allocated specifically to each segment.

However, inclusion of the following expenses in segment profits is at the discretion of management:

• general corporate expenses
• interest expense
• income tax expense
• gain/loss on discontinued operations
• equity in net income of another company

The foregoing expenses may be reported separately from segment profits and may be subtracted from the sum of segment profits to arrive at total operating profit.

In addition, some revenues may not be allocated to segments and may be added to the sum of segment profits to arrive at total operating profit.

Question 20

Under US GAAP, what must a company disclose about each of its reportable segments?

Answer 20

1. Profit and loss (external sales, sales to other segments, expense items)
2. Total assets
3. Factors used to identify segments (e.g. geographies, product lines, etc.)
4. Products and services of each segment
5. Measurement criteria (basis of accounting)
6. Reconciliations of segments to total enterprise (revenues, P&L, assets)

Question 21

Which types of entities are required to report on business segments?

Answer 21

Only publicly traded enterprises.

Question 22

What must reportable segments disclose under IFRS but not under US GAAP?

Answer 22

Liabilities of each reportable segment.

Question 23

Under Regulation S-X, what should be included in the audited financial statements an issuer files with the SEC?

Answer 23

1. Two most recent annual balance sheets
2. Income statement for three years preceding date of the most recent balance sheet
3. Change in Owners’ Equity for three years preceding date of the most recent balance sheet
4. Cash flow statement for three years preceding date of the most recent balance sheet

Question 24

What are the criteria for an accelerated filer?

Answer 24

1. Market cap of $75M to $700M
2. Has been subject to SEC reporting requirements for 12 months or more
3. Previously filed at least one report
4. Not eligible for 10Q-SB or 10K-SB

Question 25

How long does an accelerated filer have to file its 10-K after the end of a fiscal year?

Answer 25

75 days

Question 26

How long does a large accelerated filer have to file its 10-K after the end of a fiscal year?

Answer 26

60 days

Question 27

How long does an issuer that is neither an accelerated filer nor a large accelerated filer have to file its 10-K after the end of a fiscal year?

Answer 27

90 days

Question 28

For what periods is an issuer required to present balance sheets on form 10-Q?

Answer 28

1. The most recent quarter
2. The end of the preceding fiscal year

If the company has large seasonal fluctuations, it may also be required to present a balance sheet for the same quarter in the prior year.

Question 29

Per Regulation S-X, what kind of cash flow statement should be presented in interim financial statements (i.e. form 10-Q)?

Answer 29

Year-to-date cash flow since the end of the prior fiscal year. Quarterly cash flow need not be reported from Q2 to Q4.

Question 30

How long does a large accelerated filer have to file its 10-Q after the end of a quarter?

Answer 30

40 days.

Question 31

Per GAAP, what’s the correct way to amortize capitalized software costs?

Answer 31

Annual amortization expense equals the greater of:

• Straight line: (1 ÷ expected economic life) x total capitalized amount
• Percentage of revenue: (actual sales of the software during the year ÷ total projected sales of software during the year) x total capitalized amount

E.g., Codey Inc. capitalized $500,000 of software costs, which have an expected economic life of five years. In year 1, Codey sold $15,000 of software, though it had expected to sell $100,000.

Straight line: (1 ÷ 5) x $500,000 = $100,000
Percentage of revenue: ($15,000 ÷ $100,000) x $500,000 = $75,000
Amortization expense = $100,000

Question 32

Per GAAP, at what point may a company begin capitalizing costs of internally developed software?

Answer 32

Once technological feasibility has been achieved.

Question 33

How is goodwill impairment calculated under IFRS?

Answer 33

Under IFRS, goodwill impairment is a one-step test performed at the level of the cash-generating unit (CGU):

Carrying value of CGU - Recoverable amount of CGU = impairment loss

If the impairment loss is negative, there is no impairment loss.

If the impairment loss is positive, it is allocated first to goodwill. Any remainder is allocated pro rata to the CGU’s other assets.

A cash-generating unit (CGU) is the smallest group of assets that generates cash inflows independently of other groups of assets.

A CGU’s recoverable amount is the greater of its fair value less costs to sell or its value in use, which is the present value of future cash flows expected from the CGU.

Question 34

When does a franchisor recognize revenue from an initial franchise fee?

Answer 34

A franchisor recognizes revenue from an initial franchise fee when it has substantially performed all initial services for the franchisee and the franchisee’s right to a refund has expired. Even if the franchise agreement calls for the franchisee to pay the initial fee over several years, the franchisor recognizes all of the fee in year one if it performs all of the initial services that year. If the franchisor collects all or part of the initial services fee in year one but does not perform all initial services that year, it records the collected fee as deferred revenue and does not recognize it as revenue until all initial services have been performed.

Question 35

When does a franchisor recognize revenue from continuing franchise fees?

Answer 35

A franchisor recognizes revenue from continuing franchise fees as it performs continuing services for the franchisee. Continuing fees are often based on a percentage of franchise revenues. If a franchisee prepays continuing fees, the franchisor records the prepayments as deferred revenue and recognizes revenue as continuing services are performed.

Question 36

When a supplier sells revenue to a buyer with an unlimited right of return, what conditions must be satisfied for the supplier to recognize revenue from the sale?

Answer 36

1. Sales price is fixed
2. Buyer assumes risk of loss
3. Buyer pays consideration
4. Returns can be estimated

All four conditions must be satisfied to recognize revenue.

Question 37

How do you record the reversal of a recognized impairment loss on an intangible asset under US GAAP?

Answer 37

You don’t. Under GAAP, reversal of an impairment loss on an intangible asset is prohibited unless the asset is held for sale.

Question 38

Explain the IFRS revaluation model.

Answer 38

Under the IFRS revaluation model, intangible assets are valued at cost and then subsequently revalued at fair value at a later date.

If the fair value on the revaluation date is less than the prior carrying value, the revaluation loss is recognized on the income statement–unless the revaluation loss reverses a prior revaluation gain, in which case the loss is recognized in other comprehensive income and reduces the revaluation surplus from the prior gain in accumulated other comprehensive income.

If the fair value on the revaluation date is greater than the prior carrying value, the revaluation gain is recognized in other comprehensive income and as revaluation surplus in accumulated other comprehensive income in the equity section of the balance sheet.

Question 39

Explain the process of impairment testing for intangible assets under US GAAP.

Answer 39

Recoverability Test:

1. Compare the net carrying value (NCV) of the intangible asset to the undiscounted cash flows (UCF) expected from the asset. If NCV > UCF, then an impairment loss is recognized by subtracting the fair value of the asset from the carrying value.

Question 40

Explain the process of goodwill impairment testing under IFRS.

Answer 40

Compare the carrying value of a cash-generating unit (CGU) to its recoverable amount, which is the greater of 1) the CGU’s fair value less cost to sell, or 2) the CGU’s value in use, which is the present value of the CGU’s future cash flows. If the carrying value is greater than the recoverable amount, then the difference is the amount of a recognized impairment loss.

Question 41

Can research and development costs be capitalized under IFRS?

Answer 41

Under IFRS, research costs are always expensed. Development costs can be capitalized if the following criteria are met:

• technical feasibility established
• company intends to complete asset
• company able to sell or use asset
• company has sufficient resources to complete, sell, or use asset
• asset will generate future economic benefits

Question 42

When are revenue and losses recognized under the contract completion method?

Answer 42

Revenue is recognized only after the contract is completed or substantially completed.

Losses are recognized as soon as they are expected. If the sum of incurred expenses and the estimated cost of completion exceed the contract price before the contract is complete, the expected loss is recognized immediately.

Question 43

How do you calculate deferred gross profit under the installment method of revenue recognition?

Answer 43

1. Gross profit = sales - cost of sales
2. Gross profit rate = gross profit ÷ sales
3. Deferred gross profit = GP rate × AR

E.g.
Installment sales = $90,000
Cost of sales = $60,000
Installment receivables = $69,000

1. Gross profit = $90,000 - $60,000 = $30,000
2. GP rate = $30,000 ÷ $90,000 = 0.33
3. Deferred GP = 0.33 × $69,000 = $23,000

If any portion of current-year installment receivables is from the prior year, deferred GP on that portion must be calculated using the prior-year GP rate. Then sum deferred GP from both years to get current total deferred GP.