F1 - Conceptual Framework and Financial Reporting Flashcards
What is the objective of General Purpose Financing Reporting?
Provide useful information to primary users that make decisions about providing resources to the entity.
Who are the primary users?
- Existing and potential investors.
2. Other creditos.
What are the Qualitative Characteristics of useful financial information?
- Relevance.
2. Faithful representation.
What are the ingredients of Relevance?
Info must have:
- Predictive value.
- Confirming value.
- Materiality.
What are the ingredients of Faithful Representation?
Info must be:
- Complete.
- Neutral.
- Free from error.
What is ASU?
Accounting Standards Update; it is how FASB makes amends and updates to the ASC (Accounting Standards Codification).
What are the Enhancing Qualitative Characteristics?
- Comparability: When you can compare with other entities, and make sure info it is consistent.
- Understandability: Everybody can understand them.
- Timeliness: When info is available in time.
- Verifiability: When independent auditors can reach to the same conclusion.
What is the Cost Constraint?
The benefit of reporting financial information must be higher than the cost of producing the information.
What are the fundamental assumptions and principles?
- Entity Assumption: It’s a separate corp or division.
- Going Concern Assumption: Entity will not close. My heart wil go oooooon!
- Monetary Unit Assumption: Money is the key to measure, and this is why financial reporting is to report money.
- Periodicity Assumption: Reporting is divided into meaningful periods (1 year, etc).
- Measurement Principle: Financial information is accounted based on cost, not FMV.
What is the output method?
Revenue = Services performed to date.
When revenue is recognized based on the value of goods and services transferred to date relative to the remaining goods and services promised.
What are the types of output methods?
- Time elapsed.
- Milestones achieved.
- Units produced or delivered.
- Surveys of performance completed to date.
- Appraisals of results achieved.
What is the input method?
When revenue is recognized based on the entity’s efforts or inputs to the satisfaction of the performance obligation relative to the total expected inputs.
What are the types of input methods?
- Costs incurred relative to total expected costs.
- Time elapsed.
- Resources consumed.
- Labor-hours expended.
What is a repurchase agreement?
When you sell an asset, but also promise or have the option to repurchase it
What are the three main forms of repurchase agreements?
FINANCE!
- Forward: Obligation to repurchase.
- Call: Right to repurchase.
- Put: Obligation to repurchase @ customer’s request.
What is a financing arrangement?
When I have a call or a forward option, and I have to repurchase @ equal or more than original selling price.
Note that Expected Market Value can’t be greater than repurchase price.
How do you account for financial arrangements?
JE when sold:
Dr. Cash (for the selling price)
Cr. Financial Liability
If option lapses:
Dr. Financial Liability
Cr. Revenue
If option is excercised
Dr. Financial Liability
Dr. Interest Expense (repurchase price - selling price)
Cr. Cash
How is gross profit recognized on the Percentage of Completion (POC) method?
A. Overall Gross Profit = Contract price - Estimated total cost
B. % of Completion = Total Actual Costs to Date / Total Estimated Costs of Contract
- CY Profit to Date = A * B
- Current YTD GP = CY Profit to Date - Beg Profit to Date
How is a loss recognized on the Percentage of Completion (POC) and Completed method?
Losses are recognized in full in the period they are determined.
When do you recognize a current asset or a current liability with the Percentage of Completion (POC) method?
Current Asset = Accum Actual Costs + Est earnings > Progress Billings
Current Liaiblity= Accum Actual Costs + Est earnings < Progress Billings
When are items reported in discontinued operations?
When a component of an entity have been disposed or is classifed as held for sale.
What is the criteria of components “held for sale”?
- Management commits to a plan to sell the component.
- The component is available for immediate sale in its present condition.
3 An active program to locate a buyer has been initiated. - The sale of the component is probable and the sale is expected to be completed within one year.
- The sale of the component is being actively marketed.
- It is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn.
What makes a disposal be reported in discontinued operations?
When the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results.
