F1 Conceptual Framework and Financial Reporting

Question 1

What are three rules for recording adjusting journal entries?

Answer 1

1. Adjusting journal entries must be recorded by the end of the entity’s fiscal year, before the preparation of financial statements.
2. Adjusting journal entries never involve the cash account.
   All adjusting entries will hit one income statement account and one balance sheet account.

Question 2

How is a change in accounting principle reported?

Answer 2

• Cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented.
• Prior period financial statements are restated, if presented

Question 3

What are the special exceptions to the general rule for the reporting of changes in an accounting principle.

How are these exceptions reported?

Answer 3

Changes were it is impracticable to estimate the cumulative effect of adjustment, e.g., a change to LIFO from another method of inventory pricing under U.S. GAAP or a change in depreciation methods.

Such exceptions are accounted for prospectively, like a change in accounting estimate.

Question 4

How are error corrections reported?

Answer 4

Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated.

Question 5

How is a change in an accounting estimate reported?

Answer 5

Prospectively

Question 6

For long-term construction type contracts, when are losses recognized?

Answer 6

Immediately when discovered, regardless of the method used for revenue recognition.

Question 7

Name the single source of authoritative nongovernmental U.S. GAAP.

Answer 7

The FASB Accounting Standards Codification (ASC)

Question 8

Name the fundamental qualitative characteristics of useful financial information

Answer 8

Relevance and faithful representation

Question 9

Name the three elements of faithful representation.

Answer 9

Neutrality
Completeness
Freedom

Question 10

Name the pervasive constraint on the information provided in financial reporting.

Answer 10

Cost Constraint:
The benefits of reporting financial information must be greater than the costs of obtaining
and presenting the information.

Question 11

Identify two methods of revenue recognition for long term construction type contracts under U.S. GAAP.

Answer 11

% of completion
Completed contract

Question 12

What is the Private Company Council?

Answer 12

• The Financial Accounting Foundation 9FAF) created the Private Company Council (PCC) to improve standard setting for privately held companies in the U.S.
• The goal of the PCC is to establish alternatives to U.S. GAAP, where appropriate, to make private company financial statements more relevant, less complex, and cost beneficial.

Accounting alternatives for private companies are incorporated into the relevant sections of the ASC.

Question 13

Who are the primary users of general purpose financial reports?

Answer 13

Existing and Potential:
- Investors
- Lenders
- Other creditors

Question 14

List the 10 elements of financial statements according to SFAC No. 6.
CREG and LALEID

Answer 14

Comprehensive Income
Revenues
Expenses
Gains
and
Losses
Assets
Liabilities
Equity (of Net Assets)
Investments by Owners
Distribution to Owners

Question 15

Name the expense that each of the following unexpired costs turn into as they expire:
1. Inventory
2. Unexpired (prepaid) cost of insurance
3. Net book value of fixed assets
4. Unexpired cost of patents

Answer 15

1. Cost of goods sold
2. Insurance expense
3. Depreciation expense
4. Amortization expense

Question 16

When is a warranty considered a separate performance obligation within a contract?

Answer 16

If a customer has the option to purchase a warranty separately or if the warranty provides a service that is beyond the assurance that the product will comply with agreed-upon specifications, the warranty will comply with agreed-upon specifications, the warranty will be treated as a separate performance obligation.

A portion of the overall transaction price should then be allocated to the warranty obligation.

Question 17

Name the three types of accounting changes.

Answer 17

• Change in accounting principle
• Change in accounting estimate
• Change in accounting entity

Question 18

Under U.S. GAAP, how is a change in the accounting entity reported?

Answer 18

All current and prior period financial statements presented are restated.

Question 19

What is the journal entry to record the earning of deferred revenue?

Answer 19

Dr Deferred revenue
Cr Revenue