F1 - Conceptual Framework and Financial Reporting Flashcards
How is revenue/loss recognized in completed contact and percentage of completion method?
- Under completed contract method, revenue is recognized when the contract is complete.
- Under percentage of completion, % of cost incurred x gross profit
BUT expected losses in BOTH are recognized immediately in entirety!!
Accounting changes. How are accounting estimate changes and accounting principle changes accounted for? And what is an example of each? And where are they stated?
How are errors recorded? and what is included as an error?
Also, what if they’re inseparable?
Accounting changes that result in different reporting entity?
What is the exception?
Estimate changes:
- Change the depreciation method/estimated useful life
- Change to FIFO to LIFO
- PROSPECTIVE application
- reported in a component of IFCO in the period the change and future periods if the change affects both
Principle changes:
- Net of Tax
- ADJUST beg RE (net)
- Corrections of errors and/or principle (FIFO to LIFO)
- RETROSPECTIVE application
Errors:
- Financial statements are only restated due to errors
- Any “mistake” “misuse” or change from
- “cash basis to accrual basis”
If they are inseparable - the treat as change in ESTIMATE
Change in Reporting Entity:
- Restate Financial statements for all prior periods
Exception:
- Changing from FIFO TO LIFO is impractical
What are the qualitative characteristics? And their make up?
What are the ENHANCING qualitative characteristics?
Relevance
- Predicative
- Confirmatory Value
- Materiality
Faithful Representation
- Complete
- Neutral
- Free from Error
Enhancing
- Comparability
- Verifiability
- Timeliness
- Understandability
What are the steps to a multi-step income statement?
What is difference between operating and non-operating in the statement?
What is included in the following:
- Inventory cost
- Selling expense
- General and Administrative
- Non-operating
How are unusual or infrequent items displayed on IS?
Sales (COGS) = Gross Income (SGandA expenses) (Depreciation) = Operating Income (+/-Misc rev, exp, gains, losses, int income) =Income before tax (Income tax expense) = IFCO (+/- IFDO) (net of tax) = Net Income
- Nonoperating includes usual or infrequent stuff like a loss from a strike at your factory
- Operating income is everything is considered income from the operations of the business (i.e. pizza shop selling pizza). Non operating is below Operating income and are the other rev/gains and other expenses/losses (i.e. pizza shop invested in stocks that increased in value).
- Inventory Cost (COGS): purchase price/Freight in
- Selling exp: Freight out, sellers salaries and commissions, advertising
- General and Admin: office salaries, accounting, legal, insurance
- Non-operating: interest expense
Both unusual and infrequent items are reported as a separate component of income from continuing operations
Single is very simplified. Just lumps rev/gains together and exp/losses together.
Overview - what constitutes as Discontinued Operation?
Sale of:
- Operating Segment
- Reportable Unit/Segment
- Subsidiary
- Asset Group
Notes are integral part of FS, what is the first note? (not optional)
What are the “other footnotes” in FS? (dont have to list them but recognize them)
Disclosed in footnotes
Concentration is disclosed if?
What are 2 things that IFRS requires?
Summary of Significant Accounting Policies
- Basis of consolidation/basis of profit recognition
- Criteria for serving as cash equivalent
- Depreciation methods
- Methods of accounting (LIFO, FIFO, Straight line)
“Other Notes” provide details of the FS are relevant to Decision makers:
- Change in stockholders equity (did it increase cause we issued more stock or bc of earnings
- Contingency (lawsuit)
- Off BS contractual obligations (Operating leases)
- Pension plans stuff
- Post BS but BEFORE FS issued
- Related party (selling to insider greater risk)
- Concentration, Product, geographic areas, major customers (let people know that half of sales come from 1 person)
Concentration disclosed if:
- Concentration exists at the financial statement date
- Concentration makes the entity vulnerable to risk of near-term impact
- At least reasonably possible that the events that could cause the severe impact occur in near-term
IFRS requires (GAAP does not):
- Statement of compliance with applicable accounting policies
- Disclosure of judgments made in preparation of FS
Substantial doubt of an entity’s ability to continue as going concern for how long?
With going concern, how should FS be disclosed if no substantial doubt, doubt is alleviated, and doubt is not alleviated?
What happens when entity is NOT considered going concern?
- Within 1 year AFTER the date that the financial statements are issued
- If no substantial doubt then NO disclosure
- with both doubt scenarios going concern is used for both and must disclose explaining the conditions originally raising doubt
- Only time liquidation basis of accounting is used is when liquidation is imminent
When should loss/gain contingencies be accrued?
How do you record contingency liabilities that are probable under IFRS?
A loss contingency can be accrued IF:
1) Probable
2) Amount of loss is reasonable estimated
Contingent gains are not recognized in the accounts, but only footnoted
IFRS
They consider it a PROVISION instead of a liability
Also, if they give you a range say loss is 2mn to 3mn you accrue the middle 2.5mn instead of the lower value.
What is the Statement of Comprehensive Income?
And what does a piece of it include?
And how is it presented?
- All changes in equity of an entity during a period EXCEPT those resulting from investments by owners and distribution from owners (so stock investments from owners or dividends paid to owners)
- NI + OCI = Comprehensive Income
“Other Comprehensive Income” items (PUFER) (NET OF TAX):
- Pension adjustments (gains/loss costs)
- Unrealized gains/losses on AFS securities
- Foreign currency translation adjustments
- Effective CF derivative transactions
- Revaluation surplus (IFRS only)
Represented:
1) At the bottom of the IS, continue from NI and add other comprehensive income; OR
2) In a separate statement, start with NI and add other comprehensive income
What happens to net income and other comprehensive income at the end of the year?
- Net Income is closed out to Retained Earnings at the end of the year
- OCI should be closed out (NET of Tax) to Accumulated Other Comprehensive Income (AOCI) which is reported on equity section of balance sheet
What are required disclosures for all public entities?
What are the quantitative thresholds for reportable segments?
Once a reportable segment is considered reportable by the factors above, what are the disclosures?
To conform with GAAP/IFRS must report information on
- Operating segments
- Products/services
- Geographic areas
- Major customers (just disclose dont need identity)
Quantitative threshold
1) 10% test
- Total revenue (both external and intersegment sales)
- Profit or Loss
- Assets
2) 75% Reported Sufficiency Test
- Total external revenue is less than 75% of revenue
Reportable Segment Disclosures:
- Identify factors
- Products and services
- Profit or loss
- Assets
- Liabilities (IFRS ONLY)
- Measurement criteria (nature of any differences between measurement of how reportable segemnt is measured vs consolidated company
- reconciliations
Public Company Reporting Topics:
1) In how many days do the following companies need to file their 10K or 10Q reports? And what are the MVs?
Large Accelerated filer
Accelerated filer
Nonaccelerated filer
2) What is Regulation S-X?
2) Also, are 10K and 10Q audited?
3) What are the following forms:
- Form 3,4,5
- 6K
- 8K
- 20F
- 40F
Large Accelerated filer
>$700mn
10k - 60 days of fiscal year
10Q - 40 days of quarter end
Accelerated filer
$700mn - 75mn
10k - 75 days
10Q - 40 days
Nonaccelerated filer
<75mn
10k - 90 days
10Q - 45 days
2) S-X sets forth the form and content of and requirements for interim and annual FS filed with SEC
Must include audited:
- BS for 2 years
- IS/CF for 3 years
- 10k is AUDITED and includes disclosures such as summary of financial data, MDandA
- 10Q is UNAUDITED and interim period MDandA, and certain disclosures.
Forms 3,4,5 - filed by insiders directors, officers and owners of more than 10%
6K - foreign private issuers semi-annually
8k - material event like MandA or change in auditor
20F - Non-US (10K) annual report
40F - Canadian (10K) annual report
Liquidity ratios
Working Capital
Current Ratio
AcidTest (quick) ratio?
WC = CA - CL
CR = CA / CL
(Cash + Net Receivables + Marketable Securities) / Current Liabilities
Activity Ratios
Accounts Receivable Turnover; in days
Inventory Turnover; in days
Operating Cycle
Working Capital Turnover
Asset Turnover
AR Turnover = Net Credit Sales / Avg AR
Days: 365 / AR Turnover
Inv Turnover = COGS / Avg Inventory
Days: 365 / Inv Turnover
Operating Cycle = AR Turnover in days + Inv Turnover in days
WC Turnover = Sales / Avg WC
A Turnover = Net Sales / Avg Total Assets
