F1 - Conceptual FW and Financial Reporting Flashcards
Basics
What are the fundamental qualitative characteristics of useful financial information?
Faithful representation and relevance.
What are the five elements of present value measurement defined by the FASB SAFC #7?
Price for bearing uncertainty Expectations about Timing of FCF's Other Factors (Liquidity Issues and Market Imperfections) Time Value of Money Estimate of FCF
What are the “ingredients” (components) of faithful representation?
Completeness
Neutrality
Freedom from error
What are the “ingredients” (components) of relevance?
Predictive Value
Confirming Value
Materiality
What are some of the differences between managerial and financial accounting?
Managerial: internal, future focus, doesn’t have to follow GAAP, info helps decision makers at the company, less precise (generally)
Which characteristic(s) enhance both relevance and faithful representation?
Timeliness, verifiability
Under GAAP - a material transaction that is “infrequent in occurrence” and/or “unusual in nature” should be presented:
Separately, as a component of “income from continuing operations.” Gain or loss, doesn’t make a difference.
A few components of net income:
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
A few components of selling expenses:
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
A few components of G&A expenses:
Legal and audit fees: yes
Rent for office space for accounting department: yes
Interest on inventory floorplan: Nope
Single Step Income Statement
All gains and losses get grouped in with “revenues” and “expenses”
Cash bank account is overdrawn. How do we report this on Balance Sheet?
Current liability. Not included in “Cash”
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?
Noncurrent asset. Not included in “Cash”
A few components of “current assets”:
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)
A few components of “income from continuing operations” (IFRS or GAAP) on IS:
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
What line item is displayed before considering income tax effect on a multiple step income statement?
Income (loss) from operations.
Note: *Income (loss) from continuing / discontinued operations is always displayed net of taxes.
Fill in the blank: Assets = ?
Liabilities + Stockholder’s Equity.
Franchisor should report fees from franchisee as revenue when
All performance obligations have been satisfied. Usually, initial year of the sale.
Equipment sold WITH a service contract has the following journal entries:
Equipment = sales revenue JE. Service contract = deferred revenue (liability) JE until performed.
What are examples of output methods of revenue recognition?
Milestones achieved;
What are examples of input methods of revenue recognition?
Labor hours expended, resources consumed, costs incurred: total expected costs.
What are the 4 requirements to be satisfied in a bill and hold arrangement for revenue recognition?
- 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.
To qualify as a financing arrangement, the repurchase price must be
Equal to or exceed the original sales price,
Equal to or exceed the expected market value.
Merch is worth $16, sold at $20 to customer. Give me the JE’s:
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)
What amounts of gain/loss from discontinued operations should be reported in a given year income statement?
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.
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?
Year 1, as a part of the loss from discontinued operations.
How are employee relocation costs and additional pension costs associated with a discontinued operation treated?
Included as a part of losses from discontinued operations
How should the effect of a change in accounting principle inseparable from the effect of a change in accounting estimate be presented?
As a component of income from continuing operations.
Company changed from Cash Basis to Accrual Basis. How is the cumulative effect of this change treated?
Prior period adjustment, resulting from correction of an error.
Company changes their inventory accounting from FIFO to Weighted Average, how do we treat the cumulative effect of this accounting change?
Adjustment to beginning retained earnings, resulting from a change in accounting principle.
How should a change in Accounting Estimate be treated?
In current period and future periods only.
Which of the following are included in comprehensive income: loss on discontinued ops and investments by owners?
Loss on discontinued ops: Yes, included in CI
Investments by owners: No, not included in CI
What are the components of OCI (GAAP)?
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
True or false: comprehensive income includes all changes in stockholders’ equity for a period?
False. Comprehensive income doesn’t include stock transactions or dividends.
What are the components of OCI (IFRS)?
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
Which of the following are true:
- CI must be shown on the income statement
- Related tax effects for components of CI must be disclosed
- 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.
What is the purpose of reclassification adjustments on the FS that discloses CI?
To avoid double counting comprehensive income items, ie. items such as unrealized gains which were previously reported as CI.
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
Both should be included. Bonuses paid after year end increase the balance of compensation expense for a given year.
What is escrow?
________
Are prepaid real estate taxes included in year-end prepaid expenses?
Yes. Amortize appropriately as well.
Deferred revenue - included or not in comprehensive income?
Not included. Liability.
Important - change in depreciation method is what?
-How does it affect beginning RE / inventory?
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.
What is the effect of a miscalculation of inventory, whereby 40,000 was understated and not counted in year 1?
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.
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?
- As an adjustment to beginning Y2 inventory balance,
- with an offsetting adjustment to beginning Y2 retained earnings
