F1 - Conceptual FW and Financial Reporting

Question 1

What are the fundamental qualitative characteristics of useful financial information?

Answer 1

Faithful representation and relevance.

Question 2

What are the five elements of present value measurement defined by the FASB SAFC #7?

Answer 2

Price for bearing uncertainty
Expectations about Timing of FCF's
Other Factors (Liquidity Issues and Market Imperfections)
Time Value of Money
Estimate of FCF

Question 3

What are the “ingredients” (components) of faithful representation?

Answer 3

Completeness
Neutrality
Freedom from error

Question 4

What are the “ingredients” (components) of relevance?

Answer 4

Predictive Value
Confirming Value
Materiality

Question 5

What are some of the differences between managerial and financial accounting?

Answer 5

Managerial: internal, future focus, doesn’t have to follow GAAP, info helps decision makers at the company, less precise (generally)

Question 6

Which characteristic(s) enhance both relevance and faithful representation?

Answer 6

Timeliness, verifiability

Question 7

Under GAAP - a material transaction that is “infrequent in occurrence” and/or “unusual in nature” should be presented:

Answer 7

Separately, as a component of “income from continuing operations.” Gain or loss, doesn’t make a difference.

Question 8

A few components of net income:

Answer 8

When you see net income, think comprehensive income.
Adjustment for a prior-year understatement of amort expense: Not included. Affects beginning RE, not NI
Gain on AFS securities: Yes
Gain on disposal of discontinued segment: Yes
Unrealized gain on AFS debt: NO, OCI

Question 9

A few components of selling expenses:

Answer 9

Advertising - yes
Freight Out* - yes
Office Space for salesmen - yes
Sales salaries and commissions - yes
*"Freight in" is a part of COGS - so, no
Interest expense is classified as a separate line item - so, no

Question 10

A few components of G&A expenses:

Answer 10

Legal and audit fees: yes
Rent for office space for accounting department: yes
Interest on inventory floorplan: Nope

Question 11

Single Step Income Statement

Answer 11

All gains and losses get grouped in with “revenues” and “expenses”

Question 12

Cash bank account is overdrawn. How do we report this on Balance Sheet?

Answer 12

Current liability. Not included in “Cash”

Question 13

Cash bank account is segregated “solely for a long-term payment in a bond-sinking fund,” which is now a current maturity. How do we report on balance sheet?

Answer 13

Noncurrent asset. Not included in “Cash”

Question 14

A few components of “current assets”:

Answer 14

Cash (not related to bond sinking funds, etc.)
NET accounts receivable
Merchandise inventory
Investment in TRADING securities

Not included:
Deposits from customers (liability)
Unearned Rent (liability)

Question 15

A few components of “income from continuing operations” (IFRS or GAAP) on IS:

Answer 15

Large loss from foreign currency translation: yes
Union strike that shuts down operations for 3 months: yes
Foreign government takes possession of only plant: yes
Damage to a factory due to unexpected earthquake: yes

Question 16

What line item is displayed before considering income tax effect on a multiple step income statement?

Answer 16

Income (loss) from operations.

Note: *Income (loss) from continuing / discontinued operations is always displayed net of taxes.

Question 17

Fill in the blank: Assets = ?

Answer 17

Liabilities + Stockholder’s Equity.

Question 18

Franchisor should report fees from franchisee as revenue when

Answer 18

All performance obligations have been satisfied. Usually, initial year of the sale.

Question 19

Equipment sold WITH a service contract has the following journal entries:

Answer 19

Equipment = sales revenue JE. Service contract = deferred revenue (liability) JE until performed.

Question 20

What are examples of output methods of revenue recognition?

Answer 20

Milestones achieved;

Question 21

What are examples of input methods of revenue recognition?

Answer 21

Labor hours expended, resources consumed, costs incurred: total expected costs.

Question 22

What are the 4 requirements to be satisfied in a bill and hold arrangement for revenue recognition?

Answer 22

• Reason for bill and hold agreement
• Built to customer’s specifications
• Separately identifiable, cannot be directed to another customer
• Completed and ready to transfer to customer.

Question 23

To qualify as a financing arrangement, the repurchase price must be

Answer 23

Equal to or exceed the original sales price,

Equal to or exceed the expected market value.

Question 24

Merch is worth $16, sold at $20 to customer. Give me the JE’s:

Answer 24

Debit Cash 20
Debit COGS 16
  Credit Revenue 20
  Credit Inventory 16
(if there is a refund liability for say 25% of merch, liability = Cash * 25%, reducing revenue)

Question 25

What amounts of gain/loss from discontinued operations should be reported in a given year income statement?

Answer 25

Gains from sale of division assets minus any net operating losses incurred during that year. Doesn’t matter when the division is declared for sale, as long as it’s declared in that year you aggregate all NOL’s.

Question 26

If a component that is held for sale as a discontinued operation is determined to be impaired in Year 1, and is sold in Year 2, in which year do we record the impairment loss?

Answer 26

Year 1, as a part of the loss from discontinued operations.

Question 27

How are employee relocation costs and additional pension costs associated with a discontinued operation treated?

Answer 27

Included as a part of losses from discontinued operations

Question 28

How should the effect of a change in accounting principle inseparable from the effect of a change in accounting estimate be presented?

Answer 28

As a component of income from continuing operations.

Question 29

Company changed from Cash Basis to Accrual Basis. How is the cumulative effect of this change treated?

Answer 29

Prior period adjustment, resulting from correction of an error.

Question 30

Company changes their inventory accounting from FIFO to Weighted Average, how do we treat the cumulative effect of this accounting change?

Answer 30

Adjustment to beginning retained earnings, resulting from a change in accounting principle.

Question 31

How should a change in Accounting Estimate be treated?

Answer 31

In current period and future periods only.

Question 32

Which of the following are included in comprehensive income: loss on discontinued ops and investments by owners?

Answer 32

Loss on discontinued ops: Yes, included in CI

Investments by owners: No, not included in CI

Question 33

What are the components of OCI (GAAP)?

Answer 33

1) Changes in funded status of pension plan - including PSC’s NOT previously recognized as a component of net period pension costs.
2) Unrealized gains and losses on AFS debt securities
3) Foreign currency translation gains/losses
4) Instrument Specific credit risk
5) Effective portion of cash flow hedges

Question 34

True or false: comprehensive income includes all changes in stockholders’ equity for a period?

Answer 34

False. Comprehensive income doesn’t include stock transactions or dividends.

Question 35

What are the components of OCI (IFRS)?

Answer 35

1) Changes in funded status of pension plan - including PSC’s NOT previously recognized as a component of net period pension costs.
2) Unrealized gains and losses on AFS securities
3) Foreign currency translation gains/losses
4) Instrument specific credit risk
5) Effective portion of cash flow hedges
6) Revaluation surplus from the revaluation of fixed assets

Question 36

Which of the following are true:

• CI must be shown on the income statement
• Related tax effects for components of CI must be disclosed

Answer 36

• CI does NOT need to be shown on the income statement. It can be presented on the face of a combined “statement of income and CI,” in a separate section below net income, or in a separate statement of CI
• Income tax expense/benefit must be disclosed. Either on the face of the statement or in notes to the statement.

Question 37

What is the purpose of reclassification adjustments on the FS that discloses CI?

Answer 37

To avoid double counting comprehensive income items, ie. items such as unrealized gains which were previously reported as CI.

Question 38

When calculating officer’s comp expense at year end, which of the following should be included?

• Salary accruals for final days of calendar year
• Officer’s bonuses paid at the end of January Y2

Answer 38

Both should be included. Bonuses paid after year end increase the balance of compensation expense for a given year.

Question 39

What is escrow?

Answer 39

________

Question 40

Are prepaid real estate taxes included in year-end prepaid expenses?

Answer 40

Yes. Amortize appropriately as well.

Question 41

Deferred revenue - included or not in comprehensive income?

Answer 41

Not included. Liability.

Question 42

Important - change in depreciation method is what?

-How does it affect beginning RE / inventory?

Answer 42

A change in estimate. Handled prospectively. New method used starting beginning of year, start depreciating with current BV of asset. No adjustment made to RE, no retroactive adjustments at all.

Question 43

What is the effect of a miscalculation of inventory, whereby 40,000 was understated and not counted in year 1?

Answer 43

Understatement of inventory = overstatement of calculated COGS.
Overstatement of COGS = understatement of NI.
Understatement of NI = lower RE than you should have. -Therefore, increase RE by after-tax NI you missed.
-Also increase inventory by appropriate amount.

Question 44

If comparative financial statements are issued, how do we treat the year one effect of a change in inventory costing method from LIFO to FIFO?

Answer 44

• As an adjustment to beginning Y2 inventory balance,

- with an offsetting adjustment to beginning Y2 retained earnings