F2

Question 1

List the steps associated with the five-step approach to revenue recognition.

Answer 1

Step 1: Identify the contract with the customer.
Step 2: Identify the separate performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the separate performance obligations.
Step 5: Recognize revenue when or as the entity satisfies each performance
obligation.

Question 2

What criteria must be met in order to recognize revenue on a contract?

Answer 2

All the parties have approved the contract and are committed to performing their
obligations.
The rights of each party are identified.
Payment terms can be identified.
Future cash flows are expected to change as a result of the contract (commercial
substance).
It is probable that the entity will collect substantially all of the consideration.

Question 3

What criteria must be met in order for a performance obligation to be considered distinct?

Answer 3

The promise to transfer the good/service is separately identifiable from other goods or services in the contract.

The customer can benefit from the good/service independently or when combined with the customer’s own available resources.

Question 4

Define the transaction price when recognizing revenue.

Answer 4

The transaction price is the amount of consideration an entity expects to receive in exchange for transferring goods/services to a customer.

Question 5

What factors should be accounted for when determining
the transaction price?

Answer 5

The price should take into account (if applicable):
* Variable consideration
* Significant financing
* Noncash considerations
* Consideration payable to the customer

Question 6

Describe how allocation works when a contract contains more than one performance obligation.

Answer 6

For contracts with more than one performance obligation, the overall contract transaction price should be allocated among each obligation based on the stand-alone selling price expected for satisfying each unique obligation (along with applying any discounts and/or variable consideration).

Question 7

Describe how revenue recognition differs when performance is satisfied over time versus at a point in time.

Answer 7

Revenue is recognized based on measuring progress toward completion using either output or input methods when the performance obligation is satisfied over time. In order to recognize revenue when performance is satisfied at a point in time, the customer must obtain control of the asset.

Question 8

How is a change in an accounting estimate reported?

Answer 8

Prospectively

Question 9

How is a change in accounting principle reported?

Answer 9

Cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented.

Prior period financial statements are restated, if presented.

Question 10

What are the special exceptions to the general rule for the reporting of changes in an accounting principle?

How are these exceptions reported?

Answer 10

Changes where it is impracticable to estimate the cumulative effect adjustment, e.g., a change to LIFO from another method of inventory pricing under U.S. GAAP or a change in depreciation methods.

Such exceptions are accounted for prospectively, like a change in accounting estimate.

Question 11

Name the three types of accounting changes.

Answer 11

Change in an accounting principle
Change in accounting estimate
Change in accounting entity

Question 12

Under U.S. GAAP, how is a change in the accounting entity reported?

Answer 12

All current and prior period financial statements presented are restated.

Question 13

How are error corrections reported?

Answer 13

Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated.

Question 14

What four situations require adjusting journal entries in order to properly present financial statements on the accrual basis?

Answer 14

Cash is received before the performance obligation is met (deferred revenues).
Cash is paid before the expense is incurred (prepaid expenses).
Cash is received after the performance obligation has been met (receivables).
Cash is paid after the expense has been incurred (accrued expenses).

Question 15

What is the journal entry to record the earning of deferred revenue?

Answer 15

Dr Deferred Revenue $XXX
Cr Revenue $XXX

Question 16

What are the three rules for recording adjusting journal entries?

Answer 16

Adjusting journal entries must be recorded by the end of the entity’s fiscal year, before the preparation of financial statements.

Adjusting journal entries never involve the cash account.

All adjusting entries will hit one income statement account and one balance sheet account.

Question 17

Identify the contents of the Summary of Significant Accounting Policies note to the financial statements.

Answer 17

Summary of Significant Accounting Policies

Identify and describe:

 Measurement bases used in preparing the financial statements

  Specific accounting principles and methods used

Question 18

What are the U.S. GAAP disclosure requirements for risks and uncertainties?

Answer 18

Nature of operations.

Use of estimates in preparing the financial statements.

Significant estimates.

Current vulnerability due to certain concentrations.

Question 19

What is a subsequent event and what are the two categories of subsequent events?

Answer 19

An event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued.

Recognized subsequent events—Provide additional information about conditions that existed at the balance sheet date.

Nonrecognized subsequent events—Provide information about conditions that occurred after the balance sheet date and did not exist on the balance sheet date.

Question 20

Define fair value.

Answer 20

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.

Question 21

Describe the valuation techniques that can be used to measure the fair value of an asset or liability.

Answer 21

Market approach—Uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value.

Income approach—Converts future amounts, including cash flows or earnings, to a single discounted amount to measure the fair value of assets or liabilities.

Cost approach—Uses current replacement cost to measure the fair value of assets.

Question 22

Describe the hierarchy of fair value inputs. Which inputs have the highest priority?

Answer 22

Level 1 inputs—Quoted prices in active markets for identical assets or liabilities.

Level 2 inputs—Inputs other than quoted market prices that are directly or indirectly observable for an asset or liability.

Level 3 inputs—Unobservable inputs for the asset or liability that reflect the entities’ assumptions and are based on the best available information.

Note: Level 1 inputs have the highest priority.

Question 23

What are the general guidelines for OCBOA financial statement presentation?

Answer 23

Different titles from accrual basis financial statements.

Required financial statements are the equivalent of the accrual basis balance sheet and income statement.

Financial statements should explain changes in equity accounts.

A statement of cash flows is not required.

Disclosures should be similar to GAAP financial statement disclosures.

Question 24

How is gross margin calculated?

Answer 24

Gross Margin = (Sales (net) - COGS) / Sales (net)

Question 25

How is profit margin calculated?

Answer 25

Profit Margin = Net income / Sales (net)

Question 26

How is return on equity (ROE) calculated?

Answer 26

Return on equity = Net income / Average total equity

Question 27

How is return on assets (ROA) calculated?

Answer 27

Return on assets (ROA) = Net income / Average total assets

Question 28

What is the operating cash flow ratio formula?

Answer 28

Operating cash flow ratio = Cash flow from Operations / Ending current liabilities

Question 29

What is the current ratio formula?

Answer 29

Current ratio = Current assets / Current liabilities

Question 30

What is the quick ratio formula?

Answer 30

Quick ratio = (cash and equivalents + short term marketable securities + receivables (net) ) / Current liabilities

Question 31

How is days in inventory calculated?

Answer 31

Days sales in AR = Ending AR (net) / (Sales (net) / 365)

Question 32

How is days sales in accounts receivable calculated?

Answer 32

Days sales in AR = Ending AR (net) / (Sales (net) /365)

Question 33

How is days of payables outstanding calculated?

Answer 33

Days of payables OS = Ending AP / (COGS/365)

Question 34

What is the cash conversion cycle formula?

Answer 34

Cash conversion cycle = Days in inventory + Days sales in AR - Days of AP outstanding.

Question 35

What is the debt-to-equity ratio formula?

Answer 35

Debt-to-equity ratio = Total Liabilities / Total Equity

Question 36

What is the total debt ratio formula?

Answer 36

Total debt ratio = Total liabilities / Total assets

Question 37

What is the times interest earned formula?

Answer 37

Times Interest Earned = EBIT / Interest Expense

OR

Income Before Interest and taxes / Interest Expense