F1 - F3

Question 1

Annual Gross Profit (% of completion method)
this is for the last year of the contract

Answer 1

[total actual costs incurred/total expected costs] x [total expected gross profit] - total gross profit previously recognized

Question 2

Income recognized (% of completion method)
for the second, third, etc. year - not the last year

Answer 2

[total contract sales price - total ESTIMATED - total ACTUAL costs of contract] x % of completion - income previously recognized

note: % of completion = cumulative actual costs / remaining estimated costs

Question 3

Gross profit recognized (% of completion)
for the first year

Answer 3

[total contract sales price - total ESTIMATED -total ACTUAL costs of contract] x [cost incurred to date/total ESTIMATED cost of contract]

Question 4

% of completion

Answer 4

total actual costs incurred to date / total estimated cost

Question 5

reminder for the % of completion method

Answer 5

figure out GP first in case you need to recognize a loss in full; then calculate % of completion

Question 6

how to determine whether an asset or liability is recognized for % of completion method

Answer 6

cumulative costs incurred up until this point + cumulative GP (using % of completion and normal GP) - cumulative progress billings

if positive, it’s an asset; if negative, it’s a liability

Question 7

What kind of change is a change from FIFO to LIFO?

Answer 7

change in accounting estimate

Question 8

When calculating the change in accounting principle from balance sheet items in the current year, how is this handled?

Answer 8

By only adjusting for the change as of the previous year, not all years in which there was a change (you would account for all years for income statement items)

Question 9

What is required for a disclosure of vulnerability to concentration?

Answer 9

1. the concentration exists as of the financial statement date
2. the concentration makes the entity vulnerable to the risk of a near-term severe impact
3. it is at least reasonably possible that the events that could cause a severe impact from the vulnerability will occur in the near term

Question 10

What is the basic measurement/definition for fair value?

Answer 10

the price that would be received when SELLING an asset or PAID when transferring a liability in an orderly transaction between market participants

Question 11

What is the general rule for reporting segments?

Answer 11

a customer is considered to be a major customer if sales to the customer (including sales to unaffiliated customers and intersegment sales) are at least 10% of total REVENUE, not 10% of combined assets

but you can still use 10% of combined assets

Question 12

to be significant, what are the 3 criteria for segment reporting? at least 10% of:

Answer 12

1. combined revenues (whether intersegment or unaffiliated customers)
2. operating profit or loss (absolute value)
3. identifiable assets

Question 13

cash to accrual formula (receipts):

Answer 13

start: cash receipts from customers
+ ending A/R
- beg. A/R
- ending unearned revenue
+ beg. unearned revenue
- ending unearned fees

*unearned revenue is the same thing as contract liability

Question 14

Income-tax basis – treatment of nondeductible expenses

Answer 14

included in the expense category in the determination of income (ex. meals and entertainment)

Question 15

how would you determine a company’s cash-basis income/loss from operations?

Answer 15

find the difference between the cash paid and cash received

Question 16

cash to accrual formula (for expenses):

Answer 16

start: cash basis expense
+ beg. prepaid expense – b/c the cash was paid last year
- ending prepaid expense – cash payment that will be incurred next year
- beg. accrued expense – expensed last year and will be paid in cash this year
+ ending accrued expense – expense this year that will be paid in cash next year

Question 17

cash to accrual (direct vs. indirect correlation):

Answer 17

CA - same direction
CL - opposite direction

Question 18

accrual to cash (direct vs. indirect correlation):

Answer 18

CA - opposite direction
CL - same direction

Question 19

formula for rental revenue (rent receivable):

Answer 19

beg. rent receivable
+ billings accrued
- cash collections
- write-offs
ending rent receivable

Question 20

what falls under cash and cash equivalents?

Answer 20

checking accounts, bank drafts (if the total cash balance is still positive), depository accounts, CDs with less than 3 months maturity, and petty cash; NOT marketable equity and debt securities (these go under investments)

note: overdrafts are current liabilities, NOT cash

Question 21

formula for gross A/R

Answer 21

beg. A/R
+ credit sales
- collections
- write-offs
- sales returns
ending A/R

then net this with ADA

Question 22

how do you calculate the estimated liability on purchase commitments at year-end (for inventory)?

Answer 22

the amount committed for purchase - the new market value at year-end

Question 23

basic rules for inventory (FIFO and LIFO) in a period of rising prices

Answer 23

FIFO: lower COGS, higher EI, higher net income, higher RE
LIFO: higher COGS, lower EI, lower net income, lower RE

Question 24

moving average method

Answer 24

1. [beginning inventory (units x unit price) + all purchases (units x unit price)] / total beginning and purchased units = moving average unit price
   *note: include all purchases together in this first calculation
2. moving average unit price x units sold = COGS

Question 25

COGS formula

Answer 25

Beginning inventory
+ purchases
- purchase discounts
+ freight in
- ending inventory
= COGS

Question 26

LCM method:

Answer 26

*note: this is only for LIFO

1.
middle of:
-replacement cost
-(sales price - cost to sell) = ceiling
-[ceiling - (sales price x normal profit margin)] = floor

2.
lower of:
-step 1 and the cost

Question 27

T/F: Depreciable assets should not be depreciated below salvage value under any depreciation method.

Answer 27

true

Question 28

How is an old asset classified and valued if a new asset has been purchased and is being used?

Answer 28

classified: reclassified as an asset held for sale; current asset; no longer depreciated
valued: the lower of its book value or NRV (= fair value - costs to sell)

Question 29

How should you deal with impairment losses when calculating depreciation expense?

Answer 29

1. calculate the depreciation expense for year 1 and the AD for all years leading up until the impairment loss
2. subtract the impairment loss from the current carrying value (depreciable base)
3. divide the amount in step 2 by the years remaining

Question 30

how to solve the gain or loss on disposal:

Answer 30

NBV of the asset
+ accrued costs for additions to the asset that can be capitalized
- insurance proceeds
= gain/loss

Question 31

What is the first step in determining segment reporting?

Answer 31

add up all the component incomes and multiply by 10% to see which subsidiaries are reportable segments

Question 32

How to calculate composite life from composite depreciation?

Answer 32

total depreciable cost of all the assets / total annual depreciation

Question 33

How are acquisition costs treated in a business transaction?

Answer 33

expensed as incurred

Question 34

For revenue recognition on percentage of completion contracts, what constitutes a contract asset vs. a contract liability?

Answer 34

contract asset = when accumulated costs + estimated earnings (aka gross profit) exceed progress billings
contract liability = when progress billings exceed costs and estimated earnings

Question 35

How do you calculate weighted average cost of goods sold?

Answer 35

[(cost of beginning inventory + all purchases) / all units] x units sold

Question 36

What is the reporting sufficiency test?

Answer 36

you need to add more operating segments if the total external revenue reported for identified segments is < 75% of external revenue for the company overall

*note: this rule applies to external revenue only (NOT internal revenue)

Question 37

A gain that is both unusual and infrequent should be reported as what?

Answer 37

income from continuing operations (as a separate component, NOT net of tax)

Question 38

T/F: Entities that file with the SEC are not required to disclose the date through which subsequent events have been evaluated.

Answer 38

true

Question 39

What is the subsequent evaluation period for a “filer” (entity that files with the SEC)?

Answer 39

through the date that it’s financial statements are issued (when they have been widely distributed to FS users in a form and format that complies with GAAP)

Question 40

What is the subsequent evaluation period for a “non-filer” (entity that doesn’t file with the SEC; private)?

Answer 40

through the date that it’s financial statements are available to be issued (in a form and format that complies with GAAP and all approvals for issuance have been obtained)

note: this date is typically BEFORE the date the FS are to be issued

Question 41

T/F: The entire gain from the sale of fixed assets should be reported entirely in the period incurred (not proportionally throughout the rest of the year).

Answer 41

true

Question 42

How do you determine the change in beg. RE for a change in BS items vs. IS items?

Answer 42

for BS items: only take the difference for the most recent year prior

for IS items: take the cumulative effect of all prior years

Question 43

What are the basic things to remember about sum-of-the-years digits depreciation method?

Answer 43

1. add up all the years separately (ex. 4 yrs – 4 + 3 + 2 + 1 = 10)
2. for the first year, start with the highest year (ex. 4/10)
3. the depreciable base never changes each year when calculating depreciation expense
4. to get the CV, take the cost and subtract each year’s depreciation expense

Question 44

How do you calculate the value of lost inventory?

Answer 44

1. Sales x (1-GP%) = COGS
2. beg. inventory + purchases … = COGS
3. subtract anything you were able to sell
4. calculate final number based on how much can be insured

Question 45

What do you have to consider when calculating software costs?

Answer 45

1. amortization expense [(greater of cost/# of years) OR (actual sales/estimated sales) x cost]
2. impairment loss (if applicable) = (fair value - costs to sell) - CV

Question 46

Are checks and bank drafts included in cash and cash equivalents?

Answer 46

yes

Question 47

If an asset (such as equipment) can only be used for one project vs for alternative use, what is the accounting treatment?

Answer 47

use for one project – expense immediately
alternative use – capitalize and depreciate

Question 48

In determining reportable segments with a mix of profit and loss, what do you do?

Answer 48

line up all the segments with profits separately from those with losses, add them up separately, and take 10% of the greater of those two totals to use as the threshold for all segments

Question 49

How should you handle prior service costs?

Answer 49

if not recognized in net periodic pension costs, subtract from OCI

if recognized in net periodic pension costs, add to OCI

Question 50

What is the depreciable base for new owners of equipment (or any asset)?

Answer 50

original cost - newly estimated salvage value
or fair value

Question 51

What are the journal entries for pledging AR?

Answer 51

the pledging itself is just disclosed in the notes

JE 1: DR Cash CR AR
JE 2: DR Cash CR Notes Payable

Question 52

T/F: Capitalize costs if they benefit multiple periods (even if they don’t improve efficiency).

Answer 52

true

Question 53

T/F: Debt issuance costs are included in the cost of land.

Answer 53

false; they are presented as a direct reduction of the CV of the bond on the BS

Question 54

How are impairment losses shown on the income statement?

Answer 54

as a component of income from continuing operations, before tax

Question 55

What is the difference between concentration of credit risk and concentration of market risk?

Answer 55

concentration of credit risk = when multiple industries are at risk of meeting financial conditions; risk of not having enough funds to pay bills

concentration of market risk = risk of assets and liabilities being undervalued based on market conditions

Question 56

When are reversals of impairment losses acceptable?

Answer 56

when the asset is held for disposal

Question 57

When issuing interim financial statements, assuming there’s been no change in accounting principle, would you apply GAAP used in the most recent annual report or projected for use in the current year?

Answer 57

used in the most recent annual report (since there’s been no change in accounting principle adopted in the current year)

Question 58

What are the interim FS that should be issued for an SEC filer?

Answer 58

1. income statements for the most recent fiscal quarter (from preceding fiscal year through most recent fiscal quarter)
2. income statements for the cumulative 12 month period ending during the most recent fiscal quarter
3. balance sheets as of the end of the preceding fiscal year and the most recent fiscal quarter
4. statements of cash flows from the preceding fiscal year through the most recent fiscal quarter and for the same period for the preceding year