F2 Flashcards
What is the treatment of changes in accounting estimates?
Reported in net income of continuing operations. No restatement of prior financial statements. Reported prospectively.
How do you treat a change in accounting principle?
- Reported retrospectively on all financial statements provided.
- It may be a correction of error if not using GAAP (using cash-basis instead of accrual-basis.
- Changing Inventory Methods (principle)
Typically reported retrospectively as normal. - When changing to LIFO, it is considered impractical under GAAP since no history for LIFO layers. Reported prospectively, adjustment to beginning RE.
Changes from LIFO to other methods, retrospectively, as normal.
Note: When impossible to determine if it is a change in estimate or accounting principal, the change should be considered a change in estimate. Accounted for prospectively.
How do you report a change in accounting entity?
Retrospectively restating all financial statements being presented.
How do you report a correction in an accounting error?
- Corrections or Omissions are reported as adjustment net of tax.
- Missing inventory
- Missing expenses
- Incorrect accrual of expenses (prepaid’s)
NOTE: The tax effect only applies to the hit on retained earnings. For example, missing depreciation will still hit accumulated depreciation for the full gross amount but retained earnings will be adjusted net of tax.
- Retrospectively on all finc statements presented.
- If company is not presenting comparative finc statements, make adjusting entry to opening balance of retained earnings.
Name some of the disclosures required for a company’s Significant Accounting Policies
- Criteria for determining cash equivalents (especially for investment assets)
- When straight-line is used on PPE
- Basis for profit recognition on long-term construction contracts
- Revenue recognition policies
- Basis of consolidation for financing statements
List other note disclosures not under the Significant Accounting Policies
- Large percentage of sales from single or a few customers (high risk)
- Significant estimates when they are likely to change in the near term (if the effect will be material)
- Must disclose estimates used in preparation of find statements
- Changes in stockholder’s equity
- Info about significant assets/liabilities
- Carrying value and unrealized gain/loss on marketable securities
- Description of company’s pension plans
List examples of recognized subsequent events
Recognized: Accrued AND disclosed in the notes
- Legal settlement settling after reporting period (before statements issued) and having been already on the balance sheet in the reporting period. This provides new updated information as to the liability and should be updated on the B/S.
- A major customer with a balance in AR goes bankrupt after reporting period. Should be adjusted and disclosed.
List an example of an unrecognized subsequent event
Unrecognized: Should be disclosed in the notes but NOT accrued.
- A lawsuit is filed after the reporting period to the surprise of the company.
What is the subsequent event evaluation period for SEC filers and non-filers?
- SEC filers: Through the date the statements are issued (both GAAP approved and widely distributed). Not required to disclose evaluation period.
- Non SEC filer: Through date the statements are available to be issued (GAAP approved and board approval issued). Required to disclose the evaluation period on statements.
Detail the Fair Value determination process
- If no principal market: Determine most advantageous market (net of transaction cost) and use quoted price (not including transac cost).
- If it has a principal market: price received for type of asset based on observable inputs in market.
What are the three valuation approaches for fair value measurement?
MIC:
- Market approach: Use market rates for identical or similar assets
- Income approach: Utilizing income production as a measurement basis for fair value
- Cost approach: Utilizing replacement cost (minus accumulated depreciation) as basis for fair value.
List the 3 levels of fair value inputs
- Level 1 (best): identical asset on active market
- Level 2 (fair): similar asset on active market OR identical asset on inactive market
- Level 3 (worst): unobservable facts and estimates
Inventory Turnover
COGS / Average inventory (beginning + ending inventory / 2)
Debt-to-Equity
Total Liabilities / Total Equity
Net Profit Margin
Net income (after tax) / Net sales
Return on Assets (ROA)
Net income / Average total assets (beginning + ending total assets / 2)
DuPont ROA
- Net profit margin X Total asset turnover
- (Net income / Net Sales) X (Net sales / Average total assets)
Return on Equity
- Net income - Preferred dividends / Average common equity
- If no preferred stock: Net income / Average total equity
Current Ratio
Current assets / Current liabilities
Quick Ratio
Current assets (minus inventory and prepaid’s) / Current liabilities
Accounts Receivable Turnover
Sales (net) / Average Accounts Receivable (net) (beginning + ending AR /2)
Days In Inventory
Ending inventory / (COGS / 365)
Debt Ratio
Total liabilities / Total assets
Times Interest Earned
Earning Before Interest and Taxes (EBIT) / Interest Expense
