F1 - Conceptual Framework and Financial Reporting Flashcards
Absorb EVERYTHING!
Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis?
The monetary unit assumption means that money is the common denominator for economic activity and provides an appropriate basis for accounting measurement and analysis.
Define Replacement Cost:
the amount of cash or its equivalent that would be paid in order to replace an asset currently.
According to the FASB conceptual framework, an entity’s revenue may result from:
A decrease in liabilities from primary operations.
RULE: Revenues are inflows or enhancements of assets and/or settlements (decreases) in liabilities resulting from the entities ongoing major operations, not from “incidental” operations.
Current Ratio
Formula: Current Assets / Current Liabilities
Does the company have enough short term resources to fulfill their short term liabilities? The target is to acquire a ratio of at least 1.0 to show that the company has more assets than liabilities.
Quick Ratio
Formula: (Current Assets - Inventory) / Current Liabilities
Debt to Equity Ratio
Formula: Total Liabilities / Total Shareholders Equity
Deferred Revenue
Is considered money collected in advance for a product or service and is considered a liability.
CONCEPT: This transaction has created a “liability” to provide goods/services to the customer who has now paid in advance.
Gift cards/certificates are deferred revenue until they become used (and thus converted to revenue) or become expired.
Income Statement Structure
Sales - COGS = Gross income (profit) - Selling, general & admin expenses - Depreciation Equals operating income \+/- Misc. revenue/gains/expenses/losses (interest income, misc. expenses) = Income before tax - Income tax expense = Income from continuing operations \+/- Income from discontinued operations = Net income
Balance Sheet Structure
Assets = Liabilities + Shareholders’ Equity
The order of items is: Current Assets --> Cash, Inventory, Prepaid Expenses, Accounts Receivable, Short term investments. Long-term Assets Short-term Liabilities Long-term Liabilities Shareholders' Equity
Selling Expenses include:
Freight Out
Salaries and Commissions
Advertising
General & Administrative include:
Officers’ Salaries
Accounting and Legal
Insurance
Discontinued Operations
Appears below ‘Income from Continuing Operations’ on the Income statement and is presented net of tax.
The “results of operation” are presented on one line, and then the gain or loss “on the disposal of a business segment” is reported on a separate line.
(Ex.) Disposal of a component of a business.
Deferred Tax Liability
Items that will be taxable in the future create a deferred tax liability, because there is an amount that will increase taxable income in the future and therefore increased taxes.
Unearned Income (Deferred Revenue)
Occurs when a company receives money before the money is earned. This is also referred to as deferred revenue, customer deposits, unearned rent, etc. These accounts are recorded in the liability section of a Balance Sheet.
KEY: The transaction has created a “liability” to provide goods or services to the customer who has now paid in advance.
Franchise Accounting (Contracts)
A franchisor should report revenue from initial franchise fees when all performance obligations have been satisfied.
