F1 - M1 - Standards and Conceptual Framework

Question 1

Expenses

Answer 1

Operating, COGS, SG&A, Depr, part of normal operations.

Question 2

SPAC No. 7 Cash Flow Information and “Present Value”

Answer 2

• Future cash flows as measurement basis for assets and liabilities
• Measurement based on future cash flows only, 5 Elements of PV Measurement
  o Estimate of Future Cash Flow
  o Timing variations
  o Time value of money – impacts required returns / discount rate
  o Uncertainty - credit risk – impacts required returns / discount rate
  o Liquidity issues – impacts required returns / discount rate
• Traditional approach – one discount rate, scheduled known payments, PV Bonds
• Expected Cash Flow Approach – More complex cases, range of possible cash flows,
  o Examples – Warranties, estimate and accrual under the matching principle

Question 3

IFRS

Answer 3

International Financial Reporting Standards

2001, IASB responsible to issue, IFRSs, IAS

Question 4

SFAC

Answer 4

Conceptual Framework – FASB created, “Statements of Financial Accounting Concepts” or “SFAC”, basis / basic reasoning, NOT GAAP, business and nonbusiness enterprises

Question 5

SEC

Answer 5

Securities and Exchange Commission
– legal authority create “GAAP”, allows accounting profession to create and self-regulate
- 1934
- Issue securities, subject to rules and regulations
- Issues rules and regs in various releases

Question 6

CAP

Answer 6

Committee on Accounting Procedure

1939 – 1959, part-time, determined “GAAP”

Question 7

Distributions to owners

Answer 7

Not expense, not on IS, decrease in equity

Question 8

Measurement Attributes for Assets and Liabilities

Answer 8

• Historical cost = PP&E, paid for it
• Current cost - Inventory
• Net Realizable Value – AR
• Current market value – marketable securities
• Present value of future cash flows – Bonds, notes

Question 9

“Qualitative Characteristics” - “Faithful Representation”

Answer 9

• “Faithful Representation”
  o Complete – all information necessary
  o Neutral – free from bias
  o Free from error – no material error

Question 10

SFAC No. 4 Objectives by “Nonbusiness”

Answer 10

resources from contributions or grants, “other than profit”, lack ownership, most human services, churches, foundations,

• Users = Resource providers, constituents “taxpayers”, government, managers,
• “Objectives” – resource allocations, assessing services, assessing management stewardship and performance.

Question 11

Recognition Criteria

Answer 11

JE, formally recording item on F/S, classify as asset, liability, equity, revenue or expense. Needs the following:

• Measurability - $
• Relevance – capable of making a difference
• Reliability – Faithful, verifiable and neutral

Question 12

FASB

Answer 12

Financial Accounting Standards Board
1973 – current, determines “GAAP”, full-time, since 2009 issues SFAS, FIN, FTB, 7 members with 5-year terms only two terms

Question 13

“Qualitative Characteristics” - “Enhancing” Qualitative Characteristics

Answer 13

• “Enhancing” Qualitative Characteristics – Compare and verify in time to understand
  o Comparability – compared to similar information, other entities or time periods, consistency
  o Verifiability – independent observers
  o Timeliness – available in time to make a decision
  o Understandability – clear and concisely

Question 14

SFAC No. 8 Chapter 3 “Qualitative Characteristics”, useful for users

Answer 14

• “Relevance”
• “Faithful Representation”
• “Enhancing” Qualitative Characteristics

Question 15

Comprehensive Income

Answer 15

ANY change in equity other than investments or distributions

- Sum of Net Income per the Income Statement plus OCI “PUFE

Question 16

Full Disclosure Principle

Answer 16

Notes and completeness,

Question 17

Financial “information Provided” in General Purpose Financial Reports

Answer 17

“meet informational needs”, claims against, changes in resources, managements efficiency, accrual basis, FCF, earnings, growth, required return / risk

Question 18

Gains

Answer 18

“peripheral” transactions, nonoperating, not core business, sales of non-inventory, PP&E
- Selling Price / Net Realizable Value (SP – Cost to Sell) GREATER than Book Value

Question 19

Accrual Accounting

Answer 19

Record without an exchange of cash, revenue = performance obligation satifsfied, expenses = same period related to revenue / incurred

• Revenue Recognition = earned / satisfies performance and “realizable” (customer able to pay)
• Expense Recognition = incurred to generate revenue, matched against revenue (eg COGS), to periods in which assets provide benefit

Question 20

“Qualitative Characteristics” - “Relevance”

Answer 20

• “Relevance” – capable in making a difference in the decisions
  o Predictive Value – predict future outcomes
  o Confirmatory Value – feedback
  o Materiality – omission or misstatement of info would affect decision

Question 21

SFAC No. 8

Answer 21

Chapter 1 “Objective” – provide financial information about company useful to “primary users”, users make decisions about providing resources,

Question 22

Investments by owners

Answer 22

Not revenue, not on IS, increase in equity

Question 23

Cost constraint

Answer 23

Benefit is greater than cost

Question 24

Revenue

Answer 24

Selling inventory or services, part of normal operations

Question 25

SFAC No. 6 “Elements” of Financial Statements

Answer 25

REGAL ALE ID – Components of F/S – “Measurable” & “Recognition”

• Assets – Probable future economic benefit, valuation accounts may increase or decrease
• Liabilities – Probable future sacrifices of economic benefit
• Equity / “Net Assets” – residual interest in the assets

Question 26

Private Company Council

Answer 26

“PCC”, FAF created, improve for private companies, “alternatives”, more relevant, less complex and cost beneficial

Question 27

Primary Users

Answer 27

existing / potential investors, lenders and other creditors, regulators

Question 28

Fundamental Assumptions and Principles

Answer 28

• Entity Assumption – separate corp or division
• Going Concern – continue to operate in future
• Monetary Unit – money is basis
• Periodicity Assumption – meaningful time periods
• Measurement Principle – mixed attribute system for assets and liabilities to be measured at various bases

Question 29

Ongoing Standard Setting

Answer 29

“Updates” to Accounting Standards Codification “ASC”, new US GAAP
- Proposed amendment for public comment, exposure draft
- Majority vote for exposure issuance, public comment
- Reviews comments
- Another majority vote to amend to ASC
o Updates are NOT authoritative, just background

Question 30

APB

Answer 30

Accounting Principles Board

1959 – 1973, part-time, determined “GAAP”

Question 31

SFAC No. 5, Recognition and Measurement in Financial Statements, full set of F/S

Answer 31

• Statement of Financial Position – “Balance Sheet” – Financial Risk
• Statement of Earnings – “Income Statement” – Performance, operating risks
• Statement of Comprehensive Income – PUFF
• Statement of Cash Flows
• Statement of Changes in Owners’ Equity – Why do up or down?

Question 32

FASB Accounting Standards Codification

Answer 32

Effective July 1, 2009, single source of authoritative nongovernmental US GAAP

Question 33

Loses

Answer 33

Nonoperating, not core business

- Selling Price / Net Realizable Value (SP – Cost to Sell) LESS than Book Value