F2 Flashcards
Formula for recognizing G/L on long-term construction contracts over time.
(total cost to date/total cost of contract) x total estimated gross profit - gross profit recognized to date
Consignment arrangement
Dealer/distributor is tasked by entity to sell products to customer
Refund liability
book amount that is expected to returned while buyer has the right to return
Financing agreement
the repurchase price is more than the expected market value of the asset; type of put option;
selling price > repurchase > FMV
put option: entity has obligation to repurchase the asset at the customer’s request for less than the original selling price
JE for revenue recognized at a point in time (cost & billings)
Long-term construction contract
Record costs: Dr. construction in progress; Cr. material, cash, etc.
Record billings: Dr. A/R; Cr. Progress billings
JE for revenue recognized over time (estimated GP)
Record estimated GP: Dr. cost of LT construction projects, construction in progress; cr. revenue from LT construction contracts
JE for revenue recognized over time (close construction accounts)
Dr. Progress billings; cr. construction in progress
JE for revenue recognized at a point in time (close construction accounts)
D
Dr. progress billings; Cr. Revenue
Dr. Cost of LT construction contract; Cr. Construction in progress
Construction in progress account vs. progress billings
current asset vs. contra-asset
Types of repurchase agreements
Forward: Must
Call: Can
Put: obligation at customer’s request
less than selling price = lease; greater than or equal to = financing
Tx: change in accounting estimate
prospective application (no prior adjustment)
ex: useful life
Tx: change in accounting principle that is inseperable from change in estimate
accounted for as a change in estimate (prospective)
ex: change in depreciation method
Tx: change in accounting principle
retrospective application (cummulative effect adj to beg. RE net of tax)
exceptions: impractal, FIFO-LIFO
Tx: change in accounting entity
retrospective: statement of prior years for comparison
Error correction
prior period adjustment
FOB Shipping
Risks of ownership pass to the buyer upon delivery to a common carrier under FOB shipping point
The summary of significant accounting policies includes disclosures of
- measurement bases used in preparing FS
- Specific accounting principles and methods used during the year
* Basis of consolidation
* Depreciation methods
* Ammortization of intangibles
* Inventory pricing
* Use of estimates
* Fiscal year definition
* Special revenue recognition issues (long-term contracts, franchising, leasing, etc.)
How should cash for LT liabilities be reported?
long-term asset, tied with intended restriction
How are bonds held to maturity reported?
amortized cost (not FV)
Fair value hierarchy
- QUOTED observable, active, identical (ex: stock price on NYSE)
- OBSERVABLE similar in active market or identical in not active (ex: municipal bonds)
- UNOBSERVABLE inputs (estimates); biased, least reliable
Reporting loss contingencies
“probable and reasonably estimable”
Subsequent events
occurs after BS date; 2 categories (recognized & unrecognized)
Recognized subseqent event (type 1)
provides info about conditions as of BS date (recognized in FS); ex: settlement of litigation, large customer banruptcy
Unrecognized subsequent event (type 2)
provides informtion about conditition that did not exist as of BS date (not regnized in FS; potentially disclosed); ex: business combo, natural disaster
Subsequent period evaluation period
Public: evaluate through the date the FS are issued
Private: evaluate through the date that the FS are available to be issued
Subseqeunt events: Reissue FS
do not recongize additional events unless required by GAAP
Subsequent events: Revised FS
(considered reissued); do not dislose revision for SEC filer, disclose dates for non-SEC filer
Fair value valuation techniques
- Market approach: use prices from market
- Income approach: discount future CF
- Cost approach: use current replacement cost
(MIC); change in technique = change in estimate (prospective tx)
Fair value disclosures
valuation technique and inputs, uncertainties in FV, and how changes could affect entity
Fair value
(EXIT) price to sell an asset in principal (or most advantageous market)
principal: market with greatest volume (reporting entity must have access)
advantageous: best prices after considering transaction costs
Fair value for non-financial assets
i.e. land
highest and best use: highest economic benefit
Ratio analysis numerator/denominator relationship
numerator: direct relationship
denominator: inverse relationship
Profitability ratios
GP margin= (Net sales-COGS)/Net sales
Profit margn= NI/NS
Return on sales= EBIT/NS
ROA= NI/Avg. assets
Dupot ROA= profit margin x asset turnover
Return on equity = NI/avg. total equity
Op. CF= CF from op./current liabilities
measures of success or failure of an enterprise for a given period of time
Liquidity ratios
Current ratio= CA/CL
Quick= (cash+ST MS+net AR)/CL
AR turnover= NS/avg. net AR
Days in AR= ending net AR/(sales/365)
Inventory turnover= COGS/avg inventory
Days in inventory= ending inv/(COGS/365)
AP turnover= COGS/avg AP
Days AP outstanding= ending AP/(COGS/365)
Cash conversion= days AR+inventory-AP outstanding
Solvency ratios
D to E= TL/TE
TD= TL/TA
Equity mult.= TA/TE
Times int. earned= EBIT/int exp
measures of security of protection for long-term creditors/investors
Performance metrics
EBITDA= Sales-COGS-Op exp or NI+Income tax+interest+dep+amortization
EPS= income avail to CS/WACC
Price-to-earnings= price per share/basic EPS
Dividend payout= cash dividends/NI
Asset turnover= NS/Avg. assets
measures used to evaluate operating performance and elements of a company’s stock performance
Identified concentrations only need to be disclosed if all of the following criteria are met:
- The concentration exists at 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 the severe impact will occur in the near-term.
comprehensive basis of accounting other than GAAP would include
Cash basis and modified cash basis
Tax basis
Prescribed regulatory basis
Other basis with substantial support (e.g., price level basis)
