F1 Flashcards
What does PUFE(R) stand for?
P - pension adjustments U - unrealized g/l's (AFS) F - foreign currency translations E - effective portion of cash flow hedge (R) - revaluation surplus (ifrs only)
Where on the income statement are G/L’s presented if infrequent in occurrence but not unusual in nature?
Presented separately as a component of income from continuing operations. Non-operating.
Is income tax expense shown above or below net income on a multi-step income statement?
Above. Net income is absolute bottom line, excluding disc. op’s.
When do you recognize revenue for a service?
Period service is performed (earned).
What are the 4 criteria of revenue recognition?
- ) Signed contract (evidence of agreement)
- ) Risks & rewards transferred
- ) No price contingencies
- ) Standard collection terms
How would you be able to recognize revenue on a bill & hold sale? What would need to happen?
- ) Risks of ownership have passed, now seller is simply holding goods until buyer is ready to pick up.
- ) Committed to purchase & price
- ) Goods are separately stored from seller’s goods.
In a sale with unlimited right of return, what conditions must be met to record revenue?
- ) Sales price is fixed
- ) Buyers assumes all risk of loss
- ) Buyer has paid some form of consideration
- ) Amount of returns can be reasonably estimated.
When do you recognize revenue under the percentage of completion method?
As earned throughout the job. The % of revenue recognized follows the % you are done with the job, measured by cost. Therefore, 50% of cost incurred means 50% of revenue can be recognized. (Accrual accounting)
When do you recognize revenue under the installment method?
As cash comes in. (Cash basis accounting)
Completed Contract Method - U.S GAAP or IFRS or both?
U.S GAAP only.
How can you recognize revenue under IFRS for services?
Percentage of completion.
When can you recognize revenue under completed contract method? (GAAP only)
Income only on completion.
What are the requirements to use the completed contract method?
- ) Difficult to estimate costs
- ) Many contracts in progress
- ) Short duration projects
How is construction in progress shown in the financials?
As a current asset on the balance sheet. Acts like an inventory acct.
What are progress billings?
Billings on uncompleted contracts in excess of cost. (Customer paid more than what we actually did so far)
How are progress billings shown in the financials?
As a current liability on the balance sheet, almost like unearned income.
Could be excess billing, retainer, or deposits when not enough work done yet, must show as liability.
When should a loss be recognized when using the completed contract method?
Always recognize losses immediately when discovered.
What happens if you record revenue for a profit in years 1 & 2, and then realize in year 3 that you have a loss?
Record loss immediately and reverse any profit previously recognized in years 1 & 2 to recognize net loss.
What is an advantage of using the percentage of completion method for projects?
Matching principle. Revenues are recorded in the same period their related expenses are recorded.
How do you calculate GP earned for percentage of completion method?
- ) Determine total GP
- ) Determine % of job completed using cost
- ) Multiply total GP by % of job completed
- ) Back out any prior year GP recognized for CY.
Which basis of accounting is installment sales?
Cash basis.
When is revenue recognized in installment sales?
As cash is collected.
- ) Find GP %
- ) Cash collections * GP% = earned collections
- ) Receivable * GP% = deferred GP
How is the installment receivable presented on the balance sheet?
Accounts Receivable (installment sales) Less: Def. GP Equals = Balance (net)
Explain simply what the cost recovery method is…
Cash collections are first applied to recover product costs, before recognizing a profit. Expected profit is initially recorded as deferred gross profit, then, once all costs have been recovered, you can start recognizing.
When is it appropriate to use the cost recovery method?
When there is no reasonable basis for estimating collect-ability.
Where is discontinued operations shown on the financials?
Income statement, below income from cont. op’s.
- ) Operating
- ) Non-operating
- ) Disc. op’s
A component can be classified as a disc. ops (held for sale) when:
- ) commit to a plan to sell
- ) available for immediate sale
- ) active program to locate buyer
- ) sale probable within a year
- ) actively marketed
What is unique about disco’ op’s being shown below income from cont. op’s on the income statement?
It must be shown net of tax, since the income tax expense line is above income from cont. ops. If not shown net of tax, not accounting for the tax on disco ops.
WHY is disco’ ops shown below net income?
Predictive value, highly irregular and won’t be a continuing part of business.
Once a segment is classified as held for sale (disco ops), does it continue to depreciate FA?
No, stop depreciation & amort. once classified as held for sale.
What treatment does a change in accounting estimate get?
Prospective, only change moving forward.
What treatment does a change in accounting principle get? (GAAP to GAAP)
Retrospective, as if we’ve already used it. No restatement required.
What treatment does a change in entity get?
Retrospective, as if we always consolidated (example)
What treatment does an error correction get?
Retroactive (prior period adjustment)
Change in useful life of a FA is an example of a change in what?
Change in estimate with prospective application.
How should retrospective changes with cumulative effects be presented on the financials?
As an adjustment to beginning retained earnings, net of tax.
How should a change from the cash basis to accrual basis of accounting be reported?
Non-GAAP to GAAP, as a correction of an error with prior period adjustment.
How should a change in depreciation method be accounted for?
As a change in estimate, prospectively in the current and future years as a component of income from continuing op’s.
Whenever it is impossible to determine whether a change in accounting estimate or change in accounting principle has occurred, what should you do?
Treat as a change in estimate, prospectively in the CY and future years.
What is comprehensive income, what is it made up of?
Net income + OCI = Comprehensive income.
Where does OCI get closed to?
Equity - accumulated OCI.
What is the purpose of a reclassification adjustment from accum OCI (balance sheet) to the income stmt?
Avoids double counting.
Explain the difference between a single step & multi step income statement…
A multi step income statement differentiates the operating and non-operating.
What are the fundamental qualitative characteristics of useful financial info?
Relevance and faithful representation.
Name the three elements of relevance….
- ) Predictive value
- ) Confirming value
- ) materiality
Name the three elements of faithful representation
- ) Neutrality
- ) Completeness
- ) Freedom from error
Name the enhancing qualitative characteristics of financial info…
- ) Comparability
- ) Verifiability
- ) Timeliness
- ) Understandability
What should be excluded from total revenues in a single step income statement?
Items from discontinued operations.
When should warranty costs be recognized when a machine is sold with a warranty and costs are estimated to be $30 for each machine sold?
When the machines are sold, to match the revenues and related exp’s.
What are the qualitative characteristics of FS?
Relevant & Reliable (enhancing characteristics = comparable, verifiable, understandable, & timeliness)
What is the major difference between non-operating and discontinued operations?
Non-operating = Not a part of normal business of company (McDonalds selling a fridge)
Disc. Ops = Ending line/segment of business
Both don’t have predictive value.
Gains/losses that are both infrequent and unusual in nature should be reported in which section of the income statement?
Reported as a separate component of Income from continuing operations if unusual and/or infrequent
Is net income shown below or above discontinued operations?
If a company has discontinued operations, then income from continuing operations is shown above it, and net income is shown at the very bottom.
Income from cont. ops
+/- Disc. ops
Net income
Which of the following should be classified as general and admin expense?
a. ) interest
b. ) advertising
Neither
a. ) interest = nonoperating, separate line item
b. ) advertising = selling expense
What is the difference between an input vs. output method of revenue recognition (this is for recognizing revenues over time)
Output method = revenue recognized based on the value to the customer transferred to date relative to remaining promised (newspapers distributed to customer)
Input method = revenue recognized based on efforts or inputs to satisfy obligation relative to expected inputs (labor hours, costs, etc)
Where are foreign currency translation adjustments presented on the FS?
What about foreign currency remeasurement adj’s?
Translation = OCI
Remeasurement = Income Statement (included in net income)
How many years of balance sheets and income statements are required for IFRS?
Income stmt = 2 years
Balance sht = 3 years
What is the definition of comprehensive income?
All changes in equity from nonowner sources (don’t include divs, contributions, etc)
Accum. OCI is presented where on the FS?
On the balance sheet (equity section of BS)
How does a change in a valuation technique (i.e, cost approach vs. market approach) get treated as an accounting change?
Changes in valuation techniques are treated as changes in accounting estimates.
What is the minimum reporting requirement for a company that is preparing its first IFRS FS?
THREE balance sheets Two stmts of compr. income Two income stmts Two CF stmts Two stmts of changes in equity Notes
Is a change from FIFO to weighted average cost flow for inventory treated as a change in estimate or a change in accounting principle? How is it treated?
Treated as a change in accounting principle (unless was a change to LIFO which would be estimate).
Retroactive application, take value from end of previous year for both and that will be the cumulative adjustment for the current year.
