F1 - Conceptual Framework and Financial Reporting Flashcards
M1 - Standards and Conceptual Framework
What is the most authoritative source of U.S. GAAP?
The FASB Accounting Standards Codification is the single source of authoritative nongovernmental U.S. GAAP.
M1 - Standards and Conceptual Framework
What are the primary users of financial reports?
The primary users are external users such as:
- Investors
- Creditors
- Lenders
M1 - Standards and Conceptual Framework
How are amendments incorporated into the FASB Accounting Standards Codification?
By releasing an Accounting Standards Update (ASU).
An ASU is issued only after a majority vote of the members of the FASB.
M1 - Standards and Conceptual Framework
What are the objectives of financial reporting?
The objective of financial reporting is to provide financial information that is useful to the primary users of financial reports.
M1 - Standards and Conceptual Framework
What is the primary objective of financial reporting?
To provide information that is useful for economic decision making.
M1 - Standards and Conceptual Framework
Fundamental Qualitative Characteristics
Relevance:
- Predictive Value
- Confirmatory Value
- Materiality
Faithful Representation:
- Complete
- Neutral
- Free from Error
M1 - Standards and Conceptual Framework
Enhancing Qualitative Characteristics
- Comparability
- Verifiability
- Timeliness
- Understandability
M2 - Income Statement and Balance Sheet
Gross Concept
- Revenues
- Expenses
Reported at their Gross amounts
M2 - Income Statement and Balance Sheet
Net Concept
- Gains
- Losses
Reported at their Net amounts (proceeds less Net Book Value)
M2 - Income Statement and Balance Sheet
Items of income or loss that are unusual or infrequent (or both) should be reported as part of:
- 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.
M2 - Income Statement and Balance Sheet
When a fixed asset is sold, gain or loss is recognized as part of?
Income from Continuing operations.
M2 - Income Statement and Balance Sheet
Gross Profit =
Net Sales - Cost of Sales
M2 - Income Statement and Balance Sheet
Interest expense
Classified as a separate line item on the income statement.
M2 - Income Statement and Balance Sheet
Advertising
Classified as a selling expense.
M2 - Income Statement and Balance Sheet
Merchandise display cabinets
- Relate to selling activities, not the purchase COGS
- Are fixed assets whose costs should be allocated systematically over their useful life.
M2 - Income Statement and Balance Sheet
Income Statement
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
M2 - Income Statement and Balance Sheet
What is the line item displayed before considering income tax effects?
The line item “Income (loss) from operations” is shown (before taxes).
M2 - Income Statement and Balance Sheet
Income (loss) from continuing operations
The title of this line item is used in the event that the reporting organization is required to report discontinued operations.
M2 - Income Statement and Balance Sheet
Selling Expenses
- Advertising
- Freight out
- Office Space (space used for sales office)
- Sales salaries and commissions
“Freight-in” is a part of COGS.
M2 - Income Statement and Balance Sheet
General and administrative expenses
- Legal, accounting, and audit fees
- Rent for admin office (space used for office admin)
- Insurance
M2 - Income Statement and Balance Sheet
Single-step Income Statement
Lumps revenues and gains together and then expenses and losses together, netting the two leaving Net Income.
M2 - Income Statement and Balance Sheet
Multiple-step Income Statement
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.
M2 - Income Statement and Balance Sheet
Revenues (in a single-step IS) include:
- 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.
M2 - Income Statement and Balance Sheet
Licensing requirement
- 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.
