F1 - Conceptual Framework and Financial Reporting

Question 1

M1 - Standards and Conceptual Framework

What is the most authoritative source of U.S. GAAP?

Answer 1

The FASB Accounting Standards Codification is the single source of authoritative nongovernmental U.S. GAAP.

Question 2

M1 - Standards and Conceptual Framework

What are the primary users of financial reports?

Answer 2

The primary users are external users such as:
- Investors
- Creditors
- Lenders

Question 3

M1 - Standards and Conceptual Framework

How are amendments incorporated into the FASB Accounting Standards Codification?

Answer 3

By releasing an Accounting Standards Update (ASU).

An ASU is issued only after a majority vote of the members of the FASB.

Question 4

M1 - Standards and Conceptual Framework

What are the objectives of financial reporting?

Answer 4

The objective of financial reporting is to provide financial information that is useful to the primary users of financial reports.

Question 5

M1 - Standards and Conceptual Framework

What is the primary objective of financial reporting?

Answer 5

To provide information that is useful for economic decision making.

Question 6

M1 - Standards and Conceptual Framework

Fundamental Qualitative Characteristics

Answer 6

Relevance:
- Predictive Value
- Confirmatory Value
- Materiality

Faithful Representation:
- Complete
- Neutral
- Free from Error

Question 7

M1 - Standards and Conceptual Framework

Enhancing Qualitative Characteristics

Answer 7

• Comparability
• Verifiability
• Timeliness
• Understandability

Question 8

M2 - Income Statement and Balance Sheet

Gross Concept

Answer 8

• Revenues
• Expenses

Reported at their Gross amounts

Question 9

M2 - Income Statement and Balance Sheet

Net Concept

Answer 9

• Gains
• Losses

Reported at their Net amounts (proceeds less Net Book Value)

Question 10

M2 - Income Statement and Balance Sheet

Items of income or loss that are unusual or infrequent (or both) should be reported as part of:

Answer 10

• Income from Continuing operations.

The nature of the item and the Financial Statement effects should be disclosed on the face of the IS or in the footnotes.

Question 11

M2 - Income Statement and Balance Sheet

When a fixed asset is sold, gain or loss is recognized as part of?

Answer 11

Income from Continuing operations.

Question 12

M2 - Income Statement and Balance Sheet

Gross Profit =

Answer 12

Net Sales - Cost of Sales

Question 13

M2 - Income Statement and Balance Sheet

Interest expense

Answer 13

Classified as a separate line item on the income statement.

Question 14

M2 - Income Statement and Balance Sheet

Advertising

Answer 14

Classified as a selling expense.

Question 15

M2 - Income Statement and Balance Sheet

Merchandise display cabinets

Answer 15

• Relate to selling activities, not the purchase COGS
• Are fixed assets whose costs should be allocated systematically over their useful life.

Question 16

M2 - Income Statement and Balance Sheet

Income Statement

Answer 16

Net Sales
Less: COGS
= Gross Profit
Less: Expenses
= Income (loss) from Operations
Other income (gain on sale)
= Income (loss) from Continuing Operations
Less: Income tax expense
= Income before discontinued operations
Gain/Loss from discontinued segment (after tax)
= Net Income

Question 17

M2 - Income Statement and Balance Sheet

What is the line item displayed before considering income tax effects?

Answer 17

The line item “Income (loss) from operations” is shown (before taxes).

Question 18

M2 - Income Statement and Balance Sheet

Income (loss) from continuing operations

Answer 18

The title of this line item is used in the event that the reporting organization is required to report discontinued operations.

Question 19

M2 - Income Statement and Balance Sheet

Selling Expenses

Answer 19

• Advertising
• Freight out
• Office Space (space used for sales office)
• Sales salaries and commissions

“Freight-in” is a part of COGS.

Question 20

M2 - Income Statement and Balance Sheet

General and administrative expenses

Answer 20

• Legal, accounting, and audit fees
• Rent for admin office (space used for office admin)
• Insurance

Question 21

M2 - Income Statement and Balance Sheet

Single-step Income Statement

Answer 21

Lumps revenues and gains together and then expenses and losses together, netting the two leaving Net Income.

Question 22

M2 - Income Statement and Balance Sheet

Multiple-step Income Statement

Answer 22

Breaks things out so that investors can see Gross Profit, Operating Income, and then non-operating revenue/gains/losses separate from operating income, which all together is income from continuing operations. The last item is income from discontinued operations - if there is any - and then finally Net Income.

Question 23

M2 - Income Statement and Balance Sheet

Revenues (in a single-step IS) include:

Answer 23

• Net sales revenue (of goods and services)
• Interest revenues (and dividends earned)
• Gain on sale of equipment

The various amounts from discontinued operations should be included in discontinued operations, not in revenues.

Question 24

M2 - Income Statement and Balance Sheet

Licensing requirement

Answer 24

• If it is fully refundable after a couple years, it is a noncurrent asset.
• It is a noncurrent asset if the cash will be realized at a time beyond the normal operating cycle or one year.

Question 25

M2 - Income Statement and Balance Sheet

Current liabilities

Answer 25

Consist of all payables within one year.

Question 26

M2 - Income Statement and Balance Sheet

Accounting Equation

Answer 26

A = L + E

L = A - E

E = A - L