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FAR > F2 > Flashcards

F2 Flashcards

1
Q

What entry is made when a contract is signed?

A

No entry

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2
Q

When is there an increase in unearned revenue (liability) on the sale of inventory?

A

On the date the payment is received but the performance obligation has not yet been performed

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3
Q

When is the unearned revenue (liability) removed?

A

When the performance obligation is completed and sales revenue is recognized

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4
Q

When loss is expected to happen from a contract, what is it recorded as?

A

“Loss contract in progress”

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5
Q

When is a “loss contract in progress” recorded?

A

Throughout the contract, not only on the date the loss is incurred

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6
Q

If revenue is recognized over time, what effect will a loss have on operating income?

A

The loss will result in a decrease to operating income

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7
Q

If revenue is recognized at a point in time, what effect will a loss have on operating income?

A

The loss will result in a decrease to operating income

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8
Q

Steps to calculate expected gross profit on a contract

A
  1. Determine total cost based on the cost incurred YTD and the estimated cost to complete
  2. Subtract the total cost from contract price to get expected gross profit
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9
Q

How to calculate % complete when finding gross profit YTD on a contract?

A

Divide the cost incurred YTD by the total cost which includes estimated cost to complete

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10
Q

What is collection received for service contracts recorded as?

A

An increase in unearned service revenue

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11
Q

When service contracts are sold, what happens to deferred revenue?

A

Deferred revenue is increased

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12
Q

When does service revenue increase after a service contract is sold?

A

After the service is performed

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13
Q

When can services be combined into a single performance obligation?

A

When the services are similar in nature and can be provided to the buyer in a similar manner

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14
Q

What are 2 ways service performance obligations be split apart into distinct components?

A
  1. When the buyer can benefit from each service independently or in conjunction with their own available resources
  2. When the promiser to deliver each service is separately identifiable from other services
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15
Q

Deferred revenue on the books of one company is what on the books of another company?

A

Prepaid expense

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16
Q

What is a contract modification?

A

Represents a change in price or scope (or both) of a contract approved by both parties

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17
Q

What are the 2 things that need to occur for a contract modification to be treated as a new contract?

A
  1. The scope increases because of the addition of distinct goods and services
  2. The change in contract price represents stand-alone prices
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18
Q

What causes a termination of a contract when a modification is made?

A

When distinct goods and services are added but the contract price does not increase by stand-alone prices

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19
Q

What is a performance obligation?

A

A promise to transfer a good or service to a customer

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20
Q

How should a discount be treated when there are multiple performance obligations on a contract?

A

Allocated proportionally

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21
Q

How is revenue recognized using the output method?

A

Revenue is recognized based on the value to the customer of the goods and services transferred to date relative to the remaining goods or services provided

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22
Q

Example of output method

A

Milestones achieved

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23
Q

How is revenue recognized using the input method?

A

Revenue is recognized based on the entity’s efforts or inputs to the satisfaction of the performance obligation relative to the total expected inputs

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24
Q

Example of input method

A
  • Resource consumption
  • Labor hours expended
  • Costs incurred relative to total expected costs
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25
Q

If a seller enters into a verbal contract for a product that is considered “homogeneous” because of the lack of customization, when is revenue recognized?

A

Revenue is recognized at a point in time

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26
Q

What does the excess of accumulated cost plus estimated earnings over related progress billings represent?

A

Current assets

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27
Q

If related progress billings exceeds the sum of accumulated cost and estimated earnings, what does that create?

A

A liability

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28
Q

When revenue is recognized over time, when are losses recognized?

A

Immediately in their entirety

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29
Q

When revenue is recognized at a point in time, when is revenue and losses recognized?

A

Revenue is recognized when the contract is complete and losses are recognized immediately in their entirety in the year of discovery

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30
Q

Where does the effect of a change in estimate go?

A

Income from continuing operations

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31
Q

What periods do changes in estimates effect?

A

Current and subsequent periods (prospectively)

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32
Q

How should a “change in entity” be accounted for?

A

Financial statements of all previous financial statements that are presented in comparative financial statements should be account for retrospectively and should be restated

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33
Q

What are 2 ways for a change in entity to occur?

A
  1. Changing companies consolidated financial statements
  2. Consolidated financial statements versus previous individual financial statements
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34
Q

When the effect of a change in accounting principle is inseparable from the effect of change in accounting estimate, how should the change be reported?

A

Reported the same as the effect of a change in estimate, reported as a component of income from continuing operations

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35
Q

If a change in accounting estimate cannot be distinguished from a change in accounting principle, what is the change treated as?

A

Reported the same as the effect of a change in estimate, accounted for prospectively

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36
Q

If comparative financial statements are presented, how is the effect of a change in accounting principle presented?

A

Reflected by adjusting beginning retained earnings in the earliest year presented

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37
Q

If there is an understatement of ending inventory, is COGS overstated or understated?

A

Overstated (opposite)

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37
Q

How is the correction of an error from prior periods reported if comparative financial statements are present?

A

Restating all prior period presented and an adjustment to beginning retained earnings in the earliest year presented

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38
Q

How is the correction of an error from prior periods reported if there is no comparative financial statements?

A

Reported in the current retained earnings as an adjustment to the opening balance

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39
Q

If a company fails to report depreciation related to a building for a prior year, what account does the correction of the error effect?

A

Increase in accumulated depreciation in the current year (gross amount). Depreciation expense reflects the appropriate expense for the current year and should not be fixed for prior period errors

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40
Q

If an error is discovered in year 3 for a previously issued financial statement in year 1, what should be done to the financial statements for year 1 and year 2?

A

Year 1 and year 2 financial statements should be restated and the cumulative effect on Y1 and Y2 should be reflected in the carrying amount of assets and liabilities beginning balances in year 3

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41
Q

What type of change is a change in the method of depreciation?

A

Now considered both a change in method and a change in estimate

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42
Q

How should a change in depreciation method be accounted for?

A

As changes in estimate and treated prospectively

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43
Q

What does a refund liability represent?

A

The amount an entity does not expect to be entitled to receive

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44
Q

When can a company recognize revenue when there is 12 months given to return and 18 months given to exchange?

A

After the 12 months because any returns after will result in an exchange rather than a refund

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45
Q

What are progress billings?

A

Invoices requesting payment for work completed to date

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45
Q

What disclosure should the criteria for determining which investments are treated as cash equivalents be reported in?

A

Significant accounting policies

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46
Q

What disclosure should the guarantee of other entity’s indebtedness be reported in?

A

Commitments and contingincies note

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47
Q

What disclosure should refinancing of debt subsequent to the balance sheet date be reported in?

A

Separate indebtedness note

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48
Q

What disclosure should the adequacy of pension plan assets relative to vested benefits be reported in?

A

Separate pensions note

49
Q

Example of components included in the summary of significant accounting policies note:

A
  • Measurement bases
  • Accounting principles and methods
  • Criteria
  • Policies such as basis of consolidation, depreciation method, revenue recognition, etc.
50
Q

When should significant estimates be disclosed?

A

When it is reasonably possible (not probable) that the estimate will change in the near future and that the effect of the change will be material

51
Q

What is the criteria for disclosure of vulnerability of concentration?

A
  • The concentration exists as of the financial statement date
  • The concentration makes the entity vulnerable to the risk of a near - term severe impact
  • It is at least reasonably possible that the events that could cause severe impact from the vulnerability will occur in the near term
52
Q

A large accelerated filer has worldwide market value of outstanding common equity held by nonaffiliates of what amount?

A

$700 million or more

53
Q

An accelerated filer has worldwide market value of outstanding common equity held by nonaffiliates of what amount?

A

$75 million or more, but less than $700 million

54
Q

An small filer has worldwide market value of outstanding common equity held by nonaffiliates of what amount?

A

Less than $75 million

55
Q

What is the subsequent event evaluation period for entities that do not file with the SEC?

A

Through the date the financial statements are available to be issued

56
Q

How is the “available to be issued” date defined?

A
  • When the financial statements are in a form and format that comply with GAAP
  • When all approvals for issuance have been obtained
57
Q

What is the subsequent event evaluation period for entities that do file with the SEC?

A

Through the date the financial statements are issued

58
Q

How is the “issued” date defined?

A
  • When the financial statements are in a form and format that comply with GAAP
  • When the financial statements have been widely distributed to financial statement users
59
Q

What are entities that do not file financial statements with the SEC required to disclose regarding the date through which subsequent events have been evaluated?

A
  • The date through which subsequent events that have been evaluated
  • Whether the date is the date that the financial statements were issued or the date that the financial statements were available to be issued
60
Q

What are entities that do file financial statements with the SEC required to disclose regarding the date through which subsequent events have been evaluated?

A

Entities that file financial statements with the SEC are not required to disclose the date through the subsequent events that have been evaluated

61
Q

When will a subsequent event be recognized on the financial statements?

A

A subsequent event will only be recognized on the financial statements to a condition that existed as of the balance sheet date

62
Q

If a subsequent event happened after the balance sheet date but before the issue date, how should the event be recognized in the financial statements?

A

Disclosed in a note

63
Q

If a loss due to a subsequent event is “reasonably possible”, what should be reported in the disclosure?

A
  • The nature of the contingency
  • The nature of the possible loss
64
Q

If a subsequent event results in an estimated $40,000 amount to be paid, how should it be recorded as of year end?

A

Increase the expense and liability account for the amount due

65
Q

If there is no principle market, how is the fair value of a stock priced?

A

Based on the price in the most advantageous market

66
Q

What is the most advantageous market?

A

The market with the best price after considering transaction costs

67
Q

Is fair value measurement a market-based or entity-based measurement?

A

Market based

68
Q

What is fair value?

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 under market conditions

69
Q

How is fair value applied to financial instruments?

A

On an instrument-by-instrument basis

70
Q

What makes a buyer or seller a market participant?

A

Buyers and sellers acting in their economic best interest who are:
- Independent (not related parties)
- Knowledgeable about an asset or liability
- Willing and able to transact for the asset or liability

71
Q

Market approach to measure fair value

A

Uses prices and other relevant information from market transactions identical or comparable assets/liabilities to measure fair value

72
Q

Income approach to measure fair value

A

Converts future amounts, including cash flows and earnings, to a single discounted amount to measure fair value

73
Q

Cost approach to measure fair value

A

Uses current replacement cost to measure fair value

74
Q

How is fair value of nonfinancial assets determined?

A

Highest and best use

75
Q

Highest and best use

A

The market participants ability to generate economic benefits by using the asset in its highest and best use or by selling to another market participant that would use the asset in its highest and best use

76
Q

Level 3 valuation

A
  • Inputs are unobservable for the asset or liability
  • Reflecting the entity’s judgement about the assumptions that a market participant would use
77
Q

Level 2 valuation

A

Inputs other than quoted market prices that are either observable or unobservable

78
Q

Level 1 valuation

A

Quoted prices in an active market for the identical assets and liabilities on the measurement dates when no adjustments are required

79
Q

Where is an adjustment to prior year revenues, expenses, gains or losses recorded when there is an error correction?

A

Retained earnings

80
Q

How is a change from FIFO to LIFO accounted for?

A

Prospectively like a change in estimate because it is too difficult to calculate the cumulative effect

81
Q

When is risk of ownership passed to the buyer if goods are shipped “FOB destination”?

A

When the buyer receives the goods

82
Q

How should investments in bonds that are held to maturity be reported?

A

At amortized cost

83
Q

How is land recorded on the balance sheet?

A

At historical cost

84
Q

How are bonds that a company intends to hold to maturity recorded on the balance sheet?

A

Amortized cost

85
Q

When converting from accrual basis to cash basis accounting, what impact does an increase in assets have on pretax income?

A

It will decrease pretax income

86
Q

When converting from accrual basis to cash basis accounting, what impact does an increase in liabilities have on pretax income?

A

It will increase pretax income

87
Q

When converting from accrual basis to cash basis accounting, what impact does an decrease in assets have on pretax income?

A

It will increase pretax income

88
Q

When converting from accrual basis to cash basis accounting, what impact does an decrease in liabilities have on pretax income?

A

It will decrease pretax income

89
Q

What are special purpose frameworks?

A

Non-GAAP presentations and included cash basis, modified cash and tax basis of accounting

90
Q

When converting from cash basis to accrual basis accounting, what impact does an increase in assets have on pretax income?

A

It will increase pretax income

91
Q

When converting from cash basis to accrual basis accounting, what impact does an increase in liabilities have on pretax income?

A

It will decrease pretax income

92
Q

When converting from cash basis to accrual accounting, what impact does an decrease in assets have on pretax income?

A

It will decrease pretax income

93
Q

When converting from cash basis to accrual basis accounting, what impact does an decrease in liabilities have on pretax income?

A

It will increase pretax income

94
Q

Profitability ratios

A

Measures of the success or failure of an enterprise for a period of time

95
Q

Gross (profit) margin

A

Sales (net) - COGS/Sales (net)

96
Q

Profit margin

A

Net income/Sales (net)

97
Q

Return on sales

A

EBIT/Sales (net)

98
Q

Return on assets (ROA)

A

Net income/Average total assets

99
Q

DuPont return on asset

A

Net income/Sales (net) * Sales (net)/Average total assets

100
Q

Return on equity (ROE)

A

Net income/Average total equity

101
Q

Operating cash flow ratio

A

Cash flow from operations/current liabilities

102
Q

Liquidity ratios

A

Measures a firms short-term ability to pay maturing obligations

103
Q

Quick ratio

A

Cash and cash equivalents + Short term marketable securities + Receivables (net)/ Current liabilities

104
Q

Current ratio

A

Current assets/current liabilities

105
Q

Accounts receivable turnover

A

Sales (net)/Average accounts receivable (net)

106
Q

Days sales in accounts receivable

A

Ending accounts receivable(net)/(Sales (net)/365)

107
Q

Inventory turnover

A

COGS/Average inventory

108
Q

Days in inventory

A

Ending inventory/(COGS/365)

109
Q

Accounts payable turnover

A

COGS/Average accounts payable

110
Q

Days of payables outstanding

A

Ending accounts payable/(COGS/365)

111
Q

Cash conversion cycle

A

Days sales in acct receivable + days in inventory - days of payables outstanding

112
Q

COGS equation

A

Beg inventory + purchases - ending inventory

113
Q

Solvency ratios

A

Measures of security or protection for long-term creditors/investors

114
Q

Debt-to-equity

A

Total liabilities/total equity

115
Q

Total debt ratio

A

Total liabilities/total assets

116
Q

Equity multiplier

A

Total assets/total equity

117
Q

Times interest earnings

A

EBIT/Interest expense

118
Q

Performance metrics

A

Evaluates operating performance and elements of a company’s stock performance from the perspective of current and potential investors

119
Q

Price-to-earnings ratio

A

Price per share/Basic EPS

120
Q

Dividend payout

A

Cash dividend/net income

121
Q

Asset turnover

A

Sales (net)/Average total assets

FAR (6 decks)

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