F1/M1 Standards and Conceptual framework Flashcards
How to calculate Gross Margin? Multi-step I/S
Net Sales (-) Cost of Sales
How to calculate “Income (loss) from Operations”? Multi-step I/S
Gross Margin
(-) Selling Expenses
(-) General and Administrative Expenses
(-) Depreciation Expense
Land held for resale should be classified as:
Current Asset
The line item displayed before considering income tax effect on the income statement is:
“Income (loss) from operations”
“Income (loss) from continuing operations” = “Net Income” and is shown after-tax
“Discount on Bonds Payable” reduces the amount of “Bonds Payable”. True/False
True.
Revenue from the sale of a right to return can be recognized in full if all these conditions are met:
- Price is substantially fixed
- Buyer assumes all risk
- Consideration is paid
- Product sold is substantially complete
- Returns can be reasonably estimable
J/E for sale w/ right to return
Cr: A/R
Dr: Sales Revenue (for Full Amount)
When estimated returns at year end
Cr: Sales Returns and allowances
Dr: Allowance for sales returns and allowances
Criteria to recognize revenue for Sale with Buyback
Must transfer risk and reward
Cr. Cash
Dr. Revenue
If no risk transfers…
Cr. Cash
Dr. Liability
Criteria to recognize revenue for Bill and Hold Sales
- Risk of ownership has passed to buyer
- Commitment to purchase, delivery date, and fixed price
- Goods are separated
Criteria to recognize revenue under Multiple Element Arrangments
- Delivered item has value to the customer on a stand alone basis
- Right of return
- Delivery or performance is probable
Use Fair Value of separate items and distribute value on pro-rata basis
Franchisee Revenue
- Initial Franchise Fees
- Record when “Substantially performed”
- Typically, not until first day of operations - Continuing Franchisee Fees
- Revenue when earned each period
Example: Cr. Cash Cr. Notes Receivable Dr. Discount on notes reveivable Dr. Unearned franchise fee revenues
If a landlord receives a nonrefundable security deposit, how should you record as revenue?
Evenly over the time of the lease
If ticket sales are nonrefundable, should you record the entire sale of tickets before the performance as revenue?
No, recognize after performance
Completed contract method is U.S. GAAP only?
True
- Difficult to estimate costs
- More than one project outstanding
- Projects are of a short duration
Losses should be recognized in full the year they are discovered under the Completed Contract Method; T/F?
True;
- Matching principle is not achieved
- Never record profit, just loss if applicable
Percentage of completion Method
Record % of Gross Profit based on % Completed
Record loss in period discovered and reverse profit from prior periods
Matching principle used
The installment method is used when there is no reasonable basis to estimate the degree of collectibility (T/F)
True;
Cr: Installment Sales Receivable
Dr: Inventory
Dr: Deferred Gross Profit
Record Gross Profit when cash is collected, not Revenue
Discontinued operations are reported net of tax: (T/F)
True
- Impairment loss
- G/L on Disposal
- G/L from actual operations
A business component is “Held for Sale” for reporting under “Discontinued Operations” when the following criteria is met:
- Management has a plan to sell
- Component is available for sale
- Management is actively trying to sell it
- Sale is probable and can be sold within 1 year
Must be a STRATEGIC SHIFT i.e.
- Geographic area
- Major line of business
- Major equity investment
CONDUCT IMPAIRMENT IF “HELD FOR SALE”
- Lower of CV or (FV - Costs to sell)
Stop depreciating
Types of items included in Results of Discontinued Operations
- Initial Impairment loss and subsequent increase in FV
- Lower of CV or (FV - Costs to sell)
- Results of operations
- G/L on disposal of operations (in year of disposal)
Do not
Net Realizable Value =
Fair Value (-) Costs to Sell
T/F: Results of Discontinued Operations are reported net of tax
True
Events resulting in a change in Accounting Estimate (Prospective Change)
- To LIFO
- Change in Depreciation Method
- Direct Recognition Method of receivable to Installment Method
- Settlement of litigation
- Change in the useful life of an asset
Events resulting in a change in Accounting Principal (Retrospective Change)
GAAP to GAAP (Non-GAAP to GAAP) is correction of an error
Rule of Preferability (Justification)
Events:
- LIFO to FIFO
- Change from Completed Contract to % of Completion
- Adjustments must be net of tax
Changes in Accounting Entity (consolidations from acquisitions) (only U.S. GAAP)
Restate all prior financial statements as if the entities were always one
Accounting Errors (Non-GAAP to GAAP)
Prior period adjustment
- Mathematical mistakes
- Mistakes in applying GAAP
- Cash basis to Accrual basis
Adjust beginning RE for earliest year presented NET OF TAX
Going from GAAP to IFRS, how should you report changes in accounting principle?
All changes go to equity
Comprehensive Income =
Net Income
+) OCI (PUFER
OCI (PUFER) =
(P) Pension Adjustments
(U) Unrealized G/L (AFS Securities)
(F) Foreign Currency Translation Adjustments
(E) Effective Portion of Cash Flow Hegdes
(R) Revaluation Surplus (IFRS only)
Accumulated OCI
OCI from the current period is closed to AOCI
Reporting Issues for OCI
- Report either net of tax or a singe sum of tax expense
- Income tax expense is either displayed on the face of FS or in the notes
- Reported at interim dates
- AOCI is shown in equity section of BS
(T/F): Instead of “Construction Expense”, Record “Construction in Progress” under % of Completion Method for Incurred Costs.
True;
Record “Construction Expense” at the end of the year for the amount initially recognized as “Construction in Progress” along with an additional “Construction in Progress” for the amount of Gross Profit recognized
(T/F): Under the Completed Contract Method, you record revenue
False; Revenue is not recorded
(T/F): IFRS requires a statement of compliance with IFRS in footnotes
True
(T/F): The “Summary of Significant Accounting Policies” is the first or second note
True
(T/F): “Nature of Operations” is often the first footnote to the FS
True
(T/F): When it is reasonably possible that certain estimates will change in the near future, disclose the effect of the change
True
Criteria requiring disclose of certain vulnerabilities from concentration risk that could be mitigated through diversification
concentration risk…
- exists at balance sheet date
- is of significant impact
- is reasonably possible to affect entity in near term
Examples of concentration risk:
- significant customer reliance
- Few product diversity
- Reliance on single resource
- Reliance on single market or geographic region
(T/F): IFRS requires a disclosure of judgements made and GAAP does not
True
(T/F): If an entity does significant business with a customer, the entity should disclose the amount of revenue provided from that customer in accordance with concentration risk disclosures
True
(T/F): Management projects an entities ability to maintain as a going concern from 1 year as of the balance sheet date
FALSE
- 1 year from the date the Financial statements are issued
(T/F): Management should consider both qualitative and quantitative factors when evaluating the going concern?
True
(T/F): Financial statements should be prepared under the Going Concern basis of accounting if;
- Substantial Doubt Alleviated
- Substantial Doubt Not Alleviated
True for both
Only use Liquidation Accounting when the entities liquidation is imminent (IFRS does not provide guidance)
- Management has a plan to alleviate the Going Concern issue, however, you feel that it will not be effective
(T/F): Under U.S. GAAP, disclosures are required even if managements plan Alleviates Substantial Doubt
True
(T/F): A recognized subsequent event existed at the balance sheet date and requires a Journal Entry
True;
Example: Litigation that occurred before the BS date is settled before the issue date
(T/F): Nonrecognized subsequent events only require a disclosure
True Examples: - Sold bond after BS date - Changes in the FV of assets - Business combination
(T/F): Recognize events that occurred between the issue date and reissue date
False, do not recognize
(T/F): U.S. GAAP & IFRS have standardized the definition of FV except for stock compensation and lease classification
True
(T/F): Consider transaction costs when there is no principal market and you want to determine the most advantageous market
True
- May include transportation costs if location is an attribute of the asset
(T/F): Fair value is an exit price (price to sell an asset or liability), not an entrance price (price to acquire and asset or liability)
True
(T/F): Nonfinancial asset (PP&E) uses the highest and best use FV price
True
(T/F): Principal market is the market with the greatest volume or activity for the asset
True
If there is no principal market, use the most advantageous market
(T/F): Most advantageous market is the market with the highest selling price for an asset or lowest price to transfer a liability after considering transaction costs. HOWEVER, transaction costs are not included in the actual final determination of fair value.
True
- Principal market does not consider transaction costs
(T/F): Highest and best use is not applicable to Liabilities and financial assets
True: only applicable to PP&E
Valuation techniques for determining Fair Value:
(MIC)
- Market approach (Stock exchange)
- Income approach (Discounted Cash Flow)
- Cost approach (Replacement cost)
(T/F): A change in the valuation technique used to measure fair value is a change in accounting estimate
True
(T/F): U.S. GAAP requires the reporting of segment liabilities.
False, IFRS requires it
(T/F): Intercompany transactions are not eliminated for segment reporting
True
Segment reporting only applies to public companies
Operating segment criteria
- Business Component
- Activities are reviewed by chief operating decision maker
- Discrete financial information is available
(T/F): If one segment is > 90%, no segment reporting is necessary
True
10% Size test segment reporting
75% cumulative external revenue test
10% of…
- Combined Revenues (internal and external)
- Profit or loss (profit of all segment that reported a profit or loss of all segments that reported a loss)
- Assets (Combined Assets)
75% of entire entities external revenues must be represented by the segments reported
If a segment was reported in the period immediately preceding the current period, yet it doesn’t meet the segment requirement, can it still be reported?
Yes
Items usually excluded from segment revenues / expenses
Interest expense
Income taxes
General corporate revenues/expenses
(T/F): Unaffiliated customer sales and sales intracompany must be disclosed when using segment reporting?
True
(T/F): If a customer provides 10% or more of the entity-wide combined revenues (internal and external), not just a particular operating segments revenues, than this fact must be disclosed?
True
- Do not need to disclose the name of the customer
(T/F): Under IFRS, loans to officers and key management compensation must be disclosed
True
Form 10-k filing deadlines for Large accelerated, accelerated, and all others. Must have audited FS
Large acc. = 60 days
accelerated = 75 days
All others = 90 days
Form 10-q filing deadlines for Large accelerated, accelerated, and all others. Unaudited FS
Large acc. = 40 days
accelerated = 40 days
All others = 45 days
Form 11-k
Employee benefit plan
Forms 20-F and 40-F
Form 20-F = Non-U.S. 10-K
- Can use IFRS or US GAAP
Form 40-F = Canadian 10-K
- Can use IFRS or US GAAP
Form 6-K
Semi-annual foreign private issue (unaudited)
Form 8-K
Major events
Forms 3,4,&5
Required to be filed by owners of more than 10% equity
(T/F): Interim financial statements must be reviewed, not audited, by a public accounting firm
True
(T/F): Interim financial statements can omit summary of significant accounting policies and the details of accounts that have not changed significantly
True
(T/F): Annual reports require 2 FY’s of balance sheets and 3 FY’s of Income Statements and Cash Flows
True; IFRS is two of everything
(T/F): XBRL uses XML data tags
True; eXtensible Business Reporting Language uses tags, a machine readable code that gives definition to line items in F/S’s
(T/F): When filing the 10-K or 10-Q, if a company has significant seasonal fluctuations, they have to report the corresponding fiscal quarter for their F/S
True
For interim reports, only need current F/S and preceding FY F/S’s
(T/F): MD&A is required to be presented in an exhibit prepared under XBRL format when a filer submits form 10-K to the SEC
FALSE
(T/F): Special purpose frameworks (OCBOA) do not use GAAP Terms
True
Financial Statements for Cash Basis
Statement of Cash and Equity
Statement of Cash Receipts and Disbursements
Financial Statements for Modified Cash Basis
Statement of Assets and Liabilities
Statement of Revenues and Expenses Paid
Financial Statement for Income Tax Basis
Statement of Assets and Liabilities and Equity (Income tax basis)
Statement of Income (Income Tax Basis)
Converting Cash Basis Revenue to Accrual Basis Revenue
Cash Basis Revenue (+) Ending A/R (-) Beginning A/R (-) Ending Unearned revenue (+) Beginning Unearned revenue Accrual Basis revenue
Converting Cash Paid for Purchases to COGS
Cash Paid for Purchases (+) Ending A/P (-) Beginning A/P (-) Ending Inventory (+) Beginning Inventory COGS
Converting Cash Paid for Operating Expenses to Accred Operating Expenses
Cash Paid for Operating Expense (+) Ending accrued liabilities (-) Beginning accrued liabilities (-) Ending prepaid expenses (+) Beginning prepaid expenses Accrued operating expenses
Acid-Test (Quick) Ratio
Current Liabilities
- More liquid than Current Ratio
Cash Ratio
Current liabilities
Liquidity Ratios (BS / BS)
Current Ratio
Quick Ratio
Cash Ratio
Activity Ratios (IS current year / BS average)
A/R Turnover Ratio A/R Turnover in Days Inventory Turnover Ratio Inventory Turnover in days Operating Cycle Working Capital Turnover
- Turnover ratios
A/R Turnover Ratio (Activity ratio)
Avg. Net A/R (Avg. B/S)
Inventory Turnover Ratio (Activity ratio)
Avg. Inventory (Avg. B/S)
Operating Cycle (Activity ratio)
A/R Turnover in Days (+) Inventory Turnover in Days
- Collect quickly and sell quickly
Working Capital Turnover (Activity ratio)
Avg. Working Capital (Avg. B/S)
Profitability Ratio (Return ratios)
Net profit margin
Return on Total Assets
DuPont Return on Assets
Return on Common Equity
Net Profit Margin (Profitability ratio)
Net Sales
Return on Total Assets (Profitability ratio)
Avg. Total Assets
DuPont Return on Assets (Profitability ratio)
Net Profit Margin (x) Total Asset Turnover
Return on Common Equity
Avg. Common Equity
- must be greater than required rate of return
Coverage Ratios (Capital Structure, long-term approach)
Debt-to-equity
Debt-to-Assets
Times interest earned
Debt-to-equity (Coverage ratio)
Total Common S/E
