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F2 Flashcards

1
Q

After speaking to the company’s sales manager, a customer placed a large order. The customer has no immediate need for the products, so the customer asked the company to wait 60 days before delivering the products. In this case, the company should recognize revenue for the sale when the order is:

A

Delivery to the customer ensures that control of the inventory is transferred to the customer, and as a result, the company has satisfied the performance obligation and can record revenue.

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2
Q

When the total consideration for a contract with multiple embedded obligations reflects a discount, the most appropriate way to assign that discount is to:

A

Any discount that exists in a contract (based on the total value of the contract versus the stand-alone value of each obligation summed within the contract) should be allocated proportionally across all obligations within the contract. For example, if there is a contract for $240,000 with two obligations (one valued at $200,000 and the other valued at $100,000), the $60,000 discount will be assigned $40,000 to the first obligation and $20,000 to the second.

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3
Q

How should unearned rent that has already been paid by tenants for the next eight months of occupancy be reported in a landlord’s financial statements?

A

Cash received in advance of earning the revenue is reported as a liability, specifically unearned revenue. Because the liability will be satisfied within a year from the financial statement date, it will be reported as a current liability. Note that the question is asked from the landlord’s perspective. If the question was asked from the tenant’s perspective, it would be reported as a current asset (prepaid rent).

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4
Q

A contract contains multiple service-related performance obligations. All of the following criteria below will lead to the treatment of each service as a distinct obligation except:

A

When the services are all very similar in nature and can be provided to the buyer in a similar manner, this would indicate that the services can be combined into a single performance obligation. When the buyer can benefit from each service independently or in conjunction with her own available resources and when the promise to deliver each service is separately identifiable from the other services, then the performance obligation overall can be split apart into distinct components.

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5
Q

If the company would like to use an output method to recognize revenue during the first year of the contract, which of the following methods would be most appropriate?

A

Milestones achieved (whether production or distribution related) are an example of an output method used to recognize revenue. Resource consumption, labor hours expended, and costs incurred relative to total expected costs are all examples of input methods.

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6
Q

Macklin Co. entered into a service agreement with Heath Co. for an initial fee of $50,000. Macklin received $10,000 when the agreement was signed. The balance was to be paid at a rate of $10,000 per year, starting the next year. All services were performed by Macklin and the refund period had expired. Operations started in the current year. What amount should Macklin recognize as revenue in the current year?

A

Macklin Co. should report revenue from initial fees when all performance obligations of the sale have been satisfied.” Macklin Co. will recognize the entire initial fee in the current year.

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7
Q

How should the effect of a change in accounting estimate be accounted for?

A

a “change in accounting estimate” affects only the current and subsequent (future) periods, if the change affects both. It does not affect “prior periods,” nor “retained earnings.”

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8
Q

When there is a change in the reporting entity, how should the change be reported in the financial statements?

A

Retrospectively, including note disclosures, and application to all prior period financial statements presented. A change in reporting entity must be reported currently, but also retrospectively if comparative financial statements are presented.

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9
Q

Under U.S. GAAP, if a company is not presenting comparative financial statements, the correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current:

A

Retained earnings statement as an adjustment of the opening balance

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10
Q

In which of the following situations should a company report a prior-period adjustment?

A

The correction of a mathematical error in the calculation of prior years’ depreciation.

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11
Q

The cumulative effect of the change is determined:

A

Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods. The cumulative effect of the change is not determined as of the date the decision is made. The cumulative effect of a change in accounting principle is now presented as a separate category on the retained earnings statement and is not a component of net income.

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12
Q

The write-down of obsolete inventory is

A
  1. change in accounting estimate, which is handled prospectively (going forward) and does not require restatement.
  2. An insurance policy that lapsed because the premium payment wasn’t made is handled prospectively (going forward) and does not require restatement.
  3. A calculation change of warranty obligations represents a change in accounting estimate, which is handled prospectively (going forward) and does not require restatement.
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13
Q

Gusto Manufacturing changed its inventory costing method from last-in, first-out (LIFO) to first-in, first-out (FIFO). Assuming there is adequate justification for the change, Gusto would:

A

The cumulative effect of a change in accounting principle is reported net of tax as an adjustment to beginning retained earnings in the earliest year presented.

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14
Q

On January 1, Year 3, a company changed its inventory costing method from LIFO to FIFO. The company’s Year 3 financial statements contain comparative information for Year 2. How should the company present the Year 1 effect of the change in accounting principle in its Year 3 comparative financial statements?

A
  1. As an adjustment to the beginning Year 2 inventory balance with an offsetting adjustment to beginning Year 2 retained earnings.
  2. If comparative financial statements are presented, the cumulative effect of a change in accounting principle is presented net of tax as an adjustment to beginning retained earnings in the statement of stockholders’ equity.
  3. The cumulative effect of a change in principle for periods not reported in the comparative financial statements are accounted for within retained earnings.
  4. Information about a change in principle will be disclosed in the financial statements, but will also be recognized in the financial statements.
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15
Q

On August 31, Year 10, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey uses U.S. GAAP, is on a calendar year basis, and does not present comparative financial statements. The cumulative effect of the change is determined:

A

As of January 1, Year 10.

The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods, assuming comparative financial statements are not presented. Beginning retained earnings of the earliest year presented is adjusted for the cumulative effect of the change.

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16
Q

During Year 2, a company identified a Year 1 error that resulted in a $132,000 overstatement of depreciation expense. The company’s effective tax rate for Years 1 and 2 was 30 percent. Correcting the error on the opening Year 2 balance of retained earnings will result in:

A

An overstatement of expense in Year 1 will result in an understatement of net income for the year. Net income is closed into retained earnings, which means retained earnings at the end of Year 1 were understated. The impact of the understatement in Year 1 is equal to $132,000 × (1 − 0.30) = $92,400.

Correcting the error will add $92,400 to the beginning retained earnings balance in Year 2.

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17
Q

Examples of a change in accounting principle (Restating the financial statements of all prior periods)

A
  1. A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories
  2. LIFO to FIFO
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18
Q

Events resulted in estimate changes

(A change in estimate is handled prospectively. No cumulative effect adjustment is made and no separate line item presentation is made on any financial statement. If a material change is being made, appropriate footnote disclosure is necessary)

A
  1. Change in the life of the FA
  2. Adjustment of year-end accrual of officer’s salaries/bonus
  3. Write downs of absolute inventory
  4. Material non recurring IRS Adjustments
  5. Settlement of litigation
  6. Revision of estimates regarding of discontinued operation
  7. Change in accounting principals that are inseparable from a change in estimates (e.g. change from installment method to immediate recognition method because uncollectable accounts now can be estimated)
  8. A change in depreciation method is now considered to be both a change in method and a change in estimate
  9. FIFO to LIFO
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19
Q

An error correction —

Report a prior-period adjustment/ Restating the financial statements of all prior periods IF FINANCIAL STATEMENT FOR THE ERROR YEAR IS PRESENTED

Adjust Retain Earnings for the earliest year presented IF FINANCIAL STATEMENT FOR THE ERROR YEAR NOT PRESENTED

A
  1. Change from a cash-basis of accounting to accrual-basis of accounting (The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore, it is an error.
    2.A change from the income tax basis of accounting (Non-GAAP) to the accrual basis (GAAP) is an error correction.
  2. The correction of a mathematical error in the calculation of prior years’ depreciation.
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20
Q

Per U.S. GAAP, which of the following statements is correct regarding accounting changes that result in financial statements that are, in effect, the statements of a different reporting entity?

A

The financial statements of all prior periods presented should be restated.
Financial statements of all prior periods presented should be restated when there is a “change in entity” such as resulting from:
1. Changing companies in consolidated financial statements.
2. Consolidated financial statements versus previous individual financial statements.

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21
Q

If a change in accounting estimate cannot be distinguished from a change in accounting principle,

A

the change is considered a change in accounting estimate treated as a change in accounting estimate. Thus, the effect is reported prospectively as a component of income from continuing operations.

Differentiating between a change in accounting estimate and a change in accounting principle is more difficult than differentiating between a change in accounting estimate and a correction of an error, because a change can be essentially both a change in accounting estimate and a change in accounting principle. An example of this situation is a change in depreciation method. It is a change in accounting principle, but also a change in the estimated future benefits of the asset.

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22
Q

Which of the following must be included in a company’s summary of significant accounting policies in the notes to the financial statements?

Disclosure of accounting policies is an integral part of the financial statements.

Information presented in notes to the financial statements have the purpose of providing disclosures required by generally accepted accounting principles

The summary of significant accounting policies is typically the first note provided after the financial statements and will include components such as: measurement bases, accounting principles and methods, criteria, and policies such as basis of consolidation, depreciation methods, revenue recognition, etc.

A
  1. Criteria for determining which investments are treated as cash equivalents.
  2. The summary of significant accounting policies should include “policies.” Revenue recognition policies.
  3. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method.
  4. Basis of profit recognition on long-term construction contracts.
  5. Basis of consolidation.
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23
Q

Which of the following would be disclosed in the footnotes to the financial statements (REMAINING NOTES TO FS)?

A
  1. Material information regarding the company’s reported inventory, PPE, significant asset/liability balances required specific disclosure.
  2. Descriptions of the company’s pension plans.
  3. Gross unrealized gains and losses on the company’s marketable securities.
  4. Pension plan description, assets and vested benefits.
  5. Concentration of credit risk relating to financial instruments.
  6. Plant asset composition
  7. Changes in Stock Holder’s Equity Capital stock, RE, APIC, Treasury stocks, stock dividends.
  8. Faire value estimates.
  9. Contingency Losses & gains (if highly probable).
  10. Contractual obligation (bond payable & bonds payable)
  11. Segment reporting.
  12. Subsequent events .
  13. Changes to accounting principals and new accounting standards.
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24
Q

A public entity sells steel for use in construction. One of its customers accounts for 43 percent of sales, and another customer accounts for 40 percent of sales. What should the entity disclose in its annual financial statements about these two customers?

A

Concentrations in the volume of business transacted with a particular customer should be disclosed in the notes to the financial statements because these two customers individually contribute to significant sales. These concentrations increase the risk of loss, and information stating that fact should be disclosed to the financial statement user.

25
Q

Disclosure of vulnerability to concentration is required if all of the following criteria are met:

A
  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.
  4. Although the concentration in question might be in a specific geographic area, other concentrations (e.g., concentrations with respect to a specific customer or a specific supplier) must also be disclosed if the above criteria are met.
26
Q

Which of the following is NOT a disclosure requirement related to risks and uncertainties under U.S. GAAP?

A

Significant estimates should be disclosed when it is reasonably possible (not probable) that the estimate will change in the near term and that the effect of the change will be material. Immaterial items are not disclosed.

27
Q

Which of the following IS disclosure requirement related to risks and uncertainties under U.S. GAAP?

A

A. Disclosure of an entity’s major products or services and its principle markets.
B. Disclosure of concentrations when it is reasonably possible that a concentration could cause a severe impact in the near term.
C. Disclosure of the use of estimates in the preparation of the financial statements.

28
Q

Andro Co. has a $10 million note payable that is due three months after year-end. The note payable was refinanced when long-term bonds were issued one month after year-end for $11 million. The December 31 financial statements were issued two months after year-end.

How should Andro classify and disclose the note?

A

As this is a note payable that existed as of the balance sheet date, and the refinancing occurred prior to the statements being issued, the liability should be recognized as non-current and a note disclosure should be added to the financial statements explaining the change in classification.

29
Q

A contract contains multiple service-related performance obligations. All of the following criteria below will lead to the treatment of each service as a distinct obligation

A

When the services are all very similar in nature and can be provided to the buyer in a similar manner, this would indicate that the services can be combined into a single performance obligation. When the buyer can benefit from each service independently or in conjunction with her own available resources and when the promise to deliver each service is separately identifiable from the other services, then the performance obligation overall can be split apart into distinct components.

30
Q

For entities that file financial statements with the Securities and Exchange Commission, .For purposes of determining the period over which subsequent events must be evaluated, financial statements are considered to be “issued” when:

A

I. The financial statements are in a form and format that comply with GAAP.
II. The financial statements have been widely distributed to financial statement users.
III. There is no requirement for any shareholders to have acknowledged receipt of the financial statements.
IV. However, entities that file financial statements with the SEC are not required to disclose the date through which subsequent events have been evaluated.

31
Q

Which of the following information should be included in summary of significant accounting policies?

A
  1. Measurement bases used in FS
  2. Specific accounting principals and methods used during the period:
    a. Depreciation methods
    b. Amortization of intangibles
    c. Inventory pricing
    d. Use of estimates.
    e. Fiscal year definition
    f. Special revenue recognition issues
32
Q

Which of the following items would enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet?

level in the fair value hierarchy of a fair value measurement is determined by the level of the lowest level significant input.

A
  1. Level 1 valuation is a quoted price in an active market for the identical asset or liability. Quoted market prices on a stock exchange for an identical asset are considered to be a Level 1 input, the most reliable of all.
  2. Level 2 Applying fair value based on a similar asset’s value. Quoted market prices available from a business broker for a similar asset are considered to be a Level 2 input, not as reliable as those coming from a stock exchange for an identical asset.
  3. Level 3 inputs are unobservable inputs for the asset or liability, reflecting the entity’s judgment about the assumptions that a market participant would use. Projected cash flows are an unobservable input based on entity assumptions The historical performance and return on Driver’s investment in Favre are considered to be Level 3 unobservable inputs, the least reliable of all.
  4. The discounted cash flow of Favre’s operations is considered to be a Level 3 input, the least reliable of all.
33
Q

Fair value measurement

A

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date. It is a market-based measure, not an entity-based measure.

Fair value measurement should include all the assumptions that a market participant would make, including any information about restrictions, assumptions about risk.

34
Q

Valuation Techniques

A

The market approach uses prices and other relevant information from market transactions involving identical or comparable assets/liabilities to measure fair value. The company is using comparable securities where pricing is available to estimate the fair value of the private placement securities.

The income approach converts future amounts, including cash flows or earnings, to a single discounted amount to measure fair value. This company is using comparable assets to determine the fair value of the private placement securities.

The cost approach uses current replacement cost to measure the fair value of assets. This company is using comparable assets to determine the fair value of the private placement securities.

35
Q

When valuing certain financial instruments, a company that has elected the fair value measurement option must apply the accounting measurement based on which of the following criteria?
A. At the entity level.
B. Type-by-type basis.
C. Instrument-by-instrument basis.
D. A portion of an asset or liability.

A

Fair value is measured for a specific asset/liability or a group of assets/liabilities. Fair value is a market-based measure, not an entity-based measure. A company may apply fair value to financial instruments on an instrument-by-instrument basis, but once elected, fair value measurement will be used until the asset/liability is disposed.

Fair value may be applied to a specific asset/liability or a group of assets/liabilities, but it is not necessary for an entity to report all financial assets/liabilities at fair value.

Fair value may be applied to a whole financial instrument asset/liability, but does not have to be applied to every asset/liability within a certain group.

Fair value may be applied to a whole financial instrument asset/liability, not a portion of the whole.

36
Q

A change from the cost approach to the market approach of measuring fair value is considered to be what type of accounting change?

A. Change in accounting estimate.
B. Change in accounting principle.
C. Change in valuation technique.
D. Error correction.
A

A change in the valuation technique used to measure fair value is a change in accounting estimate.

Per SFAS No. 157, a change in valuation technique is a change in accounting estimate, not a change in accounting principle.

Although a change from the cost approach to the market approach is a change in valuation technique, a change in valuation technique is not defined as a type of accounting change, but instead falls into the category of changes in accounting estimate.

Both the market approach and the cost approach are acceptable methods of measuring fair value per SFAS No. 157; therefore, switching between these methods is not the correction of an error. Additionally, an error correction is not a type of accounting change.

37
Q

Each of the following titles is appropriate for financial statements prepared on the modified cash basis of accounting

The modified cash basis of accounting is a special purpose framework, otherwise known as other comprehensive basis of accounting (OCBOA). This basis, which is a hybrid of cash basis and accrual basis accounting, is acceptable for certain types of entities. However, the titles of the statements cannot be named such that it would make them appear to a reader as if they were viewing GAAP accrual basis financial statements.

A

“Balance sheet—modified cash basis” would clearly indicate the modified cash basis was used.

“Statement of assets and liabilities arising from cash transactions” would clearly indicate that the statements do not represent an accrual basis presentation.

“Statement of revenue collected and expenses paid” would clearly indicate this is a nonaccrual basis, income statement format.

Special purpose frameworks are non-GAAP presentations that include other bases of accounting, such as the cash basis and modified cash basis. The statement of cash receipts and disbursements is an example of a cash basis income statement.

38
Q

statements regarding the presentation guidelines for other comprehensive basis of accounting (OCBOA) financial statements

A

OCBOA financial statement titles should differentiate the financial statements from accrual basis financial statements.

OCBOA financial statements do report equity interests and should explain changes to equity accounts during the period.

OCBOA financial statements should include financial statements equivalent to the accrual basis balance sheet and income statement. A statement of cash flows is not required.

OCBOA financial statement disclosures should be similar to GAAP financial statement disclosures.

39
Q

common modification used to prepare modified cash basis financial statements?

A
  1. Capitalizing and depreciating FA
  2. Accrual of income taxes
  3. Recording LT and ST Liabilities and related Interest Expenses
  4. Capitalizing Inventory
  5. Reporting Investments at FMV and recognizing unrealized G/L
40
Q

Income tax-basis financial statements

A

recognize events when taxable income or deductible expenses are recognized on the entity’s tax return. Non-taxable income and non-deductible expenses are shown on the financial statement and included in the determination of income (and become M-1 adjustments to arrive at taxable income).

41
Q

INVENTORY TURNOVER

A

COGS/AVERAGE INVENTORY

42
Q

DEBT TO EQUITY RETION

A

TOTAL LIABILITY/EQUTY

43
Q

NET PROFIT MARGIN

A

NET INCOME/NET SALES

44
Q

GROSS MARGIN

A

SALES NET-COGS/SALES NET

45
Q

ROA

A

NET INCOME AFTER TAX/AVERAGR ASSET

46
Q

DU PONT ROA

A

NET INCOME/SALE NET * SALES/AVR ASSET

47
Q

ROE

A

NET INCOME/AVR EQUTY

48
Q

CURRENT RATIO

A

CA/CL

49
Q

QUICK RATIO

A

CA-INVENTORY -PREPAIDS/CL

50
Q

AR TO

A

SALES/AVR AR

51
Q

INVENTORY TO

A

COGS/AVR INVENTORY

52
Q

DAYS IN AR

A

ENDIND AR/SALES/365

53
Q

DAYS IN INVENTORY

A

END INVENTORY/COGS/365

54
Q

TOTAL DEBT RATIO

A

TOTAL LIABILITIES/TOTAL ASSETS

55
Q

TIMES INTEREST EARNED

A

EBIT/INTEREST EXP

56
Q

ASSET TO

A

SALE/AVR TOTAL ASSET

57
Q

The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that:

A

The accounts receivable turnover ratio is calculated as sales (net) / average accounts receivable (net). More aggressive collection policies will result in a decrease in the receivables balance, which in turn causes the turnover ratio to increase.

58
Q

In a comparison of 20X2 to 20X1, Neir Co.’s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

A

Choice “C” is correct. Gross profit percentage decreased.

Inventory turnover ratio = Cost of goods sold / Average inventory

In order for the inventory turnover ratio to increase, either cost of goods sold must increase or average inventory must decrease. Since the question indicates that inventory is unchanged, cost of goods sold must have increased.
If the cost of goods sold increased and sales remained constant, the gross profit percentage would decrease.

59
Q
A

FAR (4 decks)

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