F1 Flashcards
5 elements of Present Value measurement
- Estimate of future cash flow
- Expectations about timing variations of future cash flows
- Time value of money/ risk free rate of interest
- Price for bearing uncertainty- credit risk
- Other factors ex. Liquidity issues
Objective of financial reporting
To provide financial information about the reporting entity that is useful to primary users in making decisions
Characteristics of Relevance
Predictive Value - used to predict future outcomes
Confirming Value - provides feedback on past predictions
Materiality - An omission or misstatement could affect user decisions
Characteristics of Faithful Representation
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented without bias
Free from Error - No material errors or omissions
Enhancing Qualitative Characteristics
Comparability - Allows users to compare items among similar entities
Verifiability - Independent observers would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is clear, concise, easy to understand
Fudamental recognition criteria
Definition: Item meets the definition of its element
Measureability: Measurement is sufficient to be relied on
Relevance: Makes a difference to a financial statement user
Reliability: Faithful, verifiable, and neutral
Measurement attributes for assets and liabilities
Historical cost- common for PP&E Current cost- common for inventory NRV- common for A/R Current market value- common for stocks PV of future cash flows- common for bonds and notes
Periodicity Assumption
Economic activity can be divided into meaningful time periods
Full Disclosure Principle
User should be given information that makes a difference in their decision process, but not too much to prevent them from knowing what is important
Comprehensive Income
Any change in equity other than investments and distributions by owners
Revenues and expenses use the ______ while gains and losses use the ______ of reporting
Gross concept,
Net concept
Listed under Other revenues/expenses
Interest revenue/expense
Gain/loss on sale of assets
Inventory costs
Purchase price
Freight In
Selling expenses
Freight out
Salaries and Commission
Advertising
Sales department office rent
General and administrative expenses
Officer’s salaries
Accounting and legal
Insurance
5 criteria for revenue recognition
Commercial Substance Rights to Goods/Services Identified Approval & Commitment by Each Party Payment Terms Identified Collection is Probable
Output method (Revenue recognition)
Based on the value to the customer.
Units produced
Time elapsed
Milestones achieved
Input method (Revenue recognition)
Based on the entity’s efforts to satisfy obligations.
Costs incurred relative to total expected costs
Resources consumed
Labor hours expended
Time elapsed
Bill and Hold Arrangement revenue recognition criteria
Customer must have requested the arrangement
Product has been seperately identified as customer’s
Product is ready to be transferred to customer
Entity cannot use product or resell
Completed contract method criteria
Difficult to estimate
Many contracts
Short duration
When is the earliest period that a component can be reported as a discontinued operation?
When the component meets held for sale criteria:
Management commits to plan to sell
Can be sold immediately
Active program to find a buyer
Sale is probable and expected within 1 year
Active marketing of the component
Unlikely that plans to sell will change
Calculation of Income/Loss on Discontinued operations
Loss on Impairment - Impairment analysis of component must be conducted
Calculate result of operations of component for year
Calculate gain or loss on disposal of component
Accounting estimate changes events
Depreciation method Useful life of an asset Write down obsolete inventory Nonrecurring IRS adjustments Litigation settlement Fair value valuation technique Changes in accounting principle inseperable from change in estimate
3 balance sheet requirement
When applying a change in accounting principle retrospectively, an entity must present at least 3 balance sheets: end of current period and beginning and end of prior period.
Only required by IFRS, not GAAP
Reporting change in estimate
Apply change to current income from continuing operations
Disclose in notes if material
Reporting change in accounting principle
Restate all prior periods presented
Adjust beginning RE for cumulative effective of change in earliest period presented
Types of Other Comprehensive Income
Pension Adjustments- until they are recognized
Unrealized G/L on AFS debt securities
Foreign currency translations G/L
Instrument Specific Credit Risk
Effective Portion of Cash Flow Hedges (until cash flows are realized, then go to I/S)
IFRS only- Revaluation surplus
AOCI is reported in the ________
Balance sheet/ Statement of Financial Position
Required disclosures of OCI
Tax effects of each component
Changes in accumulated balances of each OCI item
Total AOCI (presented in balance sheet)
Reclassification adjustments
