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CPA Review > F2 > Flashcards

F2 Flashcards

1
Q

Assets?

A

Probable future economic benefits that are obtained or controlled by a particular entity as a result of past events or transactions.

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2
Q

Liabilities?

A

Probable future sacrifices of economic benefits that an entity faces for obligations to provide services or transfer assets due to past events or transactions.

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3
Q

Revenues?

A

Are increases of assets or reductions of liabilities during period of time

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4
Q

4 criteria required for CONTRACT revenue to be recognized?(U.S. GAAP: Evidence of Delivery of Priceless Collection.)

A
  1. Persuasive evidence of an arrangement exists
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5
Q

Under U.S.GAAP, what are the criteria required for a sale to take place?

A
  1. Delivery of goods or setting aside goods ordered
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6
Q

Under IFRS, what are the 4 categories of revenue recognition?

A
  1. Sale of Goods
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7
Q

1-Conditions required for the revenue from Sale of Goods to be recognized? (IFRS)

A
  1. Revenue and cost incurred for the transactions can be MEASURED RELIABLY
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8
Q

2-Rendering of Services(IFRS)?

A
  1. Rev.and Costs incurred for the transaction can be MEASURED RELIABLY
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9
Q

3-Revenue from Interest, Royalties, and Dividends(IFRS)

A
  1. Revenue can be MEASURED RELIABLY
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10
Q

4-Construction Contracts(IFRS)

A
  1. The contract revenue and contracts costs attributable to the transaction can be MEASURED RELIABLY.
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11
Q

Multiple Element Arrangements(U.S.GAAP)

A

Doing Lots of stuff for customer. When a sales contract includes multiple products or services, the fair value of the contract must be allocated to the separate contract elements. Revenue is then recognized separately for each element based on the revenue recognition criteria appropriate for each element.

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12
Q

Deferred Credit? (cash is paid or received; No current IS impact)

A

When cash is received before it is earned, a deferred credit(unearned revenue or deferred revenue) is reported. E.g. Unearned interest income, unearned rental income, unearned royalty income.

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13
Q

BASE? (unearned revenue)

A

Beginning Balance

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14
Q

Accrued Assets (or accrued revenues)

A

The recognition of an accrued asset represents revenue recognized or earned through the passage of time but not yet paid to the entity.

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15
Q

Accrued Liabilities(or accrued expenses)

A

Accrued liabilities represent expenses recognized or incurred through the passage of time but not yet paid by the entity. Journal entries:

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16
Q

Payroll Journal entries:

A

Dr. Wages expense

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17
Q

BASE? (Accrued Salary Payable)

A

Beginning Balance of accrued salary payable

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18
Q

Estimated Liabilities

A

Estimated liabilities represent the recognition of probable future charges that result from a prior act.

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19
Q

Royalty Revenue

A

Royalty revenue is recognized when earned. Formula:

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20
Q

Revenue Recognition when the Right of Return Exists

A

Shall be recognized at the time of sale only if All the following conditions are met:

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21
Q

Sale tax payable calculation?

A

[Credit to sale Rev/(1+tax rate)]* tax rate = sale tax collected - sale tax prepaid = Sale tax payable

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22
Q

When to recognize Initial Franchise Fees?

A

When “ initial services are Substantially performed”. Initial services from franchisor including: site selection, supervision of construction, bookkeeping services, and quality control.

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23
Q

Intangible Assets?

A

Intangible Assets are long-lived legal rights and competitive advantages developed or acquired by a business enterprise.

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24
Q

Classification of intangible Assets?

A
  1. Identifiable intangible assets: Patents, copyrights, franchises, trademarks…
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25
Q

Manner of Acquisition of Intangible Assets

A
  1. Purchased Intangible Assets (Record at cost)
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26
Q

Purchased Intangible Assets

A

Intangible assets acquired from other enterprises or indvs. should be recorded as an asset at cost. Legal and registration fees incurred to obtain an intangible asset should also be capitalized.

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27
Q

Internally developed Intangible Assets

A

a. Under U.S.GAAP, the cost of internally intangible assets not acquired from others(i.e, developed internally) should be expensed agaist income when incurred because U.S.GAAP prohibits the capitalization of research and development costs.

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28
Q

Exception to “must be expensed rules” for internally developed Intangible assets

A

Certain costs associated with intangibles that are specifically identifiable can be capitalized such as:

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29
Q

U.S. GAAP VS. IFRS

A

Under IFRS, research costs related to an internally devl. intangible asset must be expensed, but an intangible asset arising from devlm. is recognized if the entity can demonstrate all of the following:

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30
Q

PASS KEY

A

A patent is amortized over the shorter of its estimated life or remaining legal life.

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31
Q

Amortization of intangible assets with finite life

A

Cost of each type of intangible asset with finite life should be amortized by systematic charges to income over the period estimated to be benefit. Generally, using straight-line method.

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32
Q

Amortization of intangible asset with indefinite life(goodwill)

A

Amortization of purchased goodwill is not permitted. The required approach is to test goodwill for impairment at least annually.

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33
Q

Income Tax Effect

A

Amortization of acquired intangible assets that are not specifically identifiable(e.g. goodwill) is deductible over a 15-year period in computing income taxes payable.

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34
Q

Valuation of intangible assets under U.S.GAAP

A

Under U.S. GAAP, finite life are reported at cost less amortization and impairment. Indefinite life intangible assets are reported at cost less impairment.

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35
Q

Valuation of intangible assets under IFRS

A
  1. Cost Model: like U.S. GAAP
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36
Q

Exceptions

A

a. Revaluation losses( reported on IS):

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37
Q

Example-IFRS intangible asset revaluation

A

On 12-31-Yr 2, an entity that had adopted the IFRS revaluation model in Yr 1 adjusted its patents to fair value. On that date, the patents had $8,200,000 carrying value and $9,100,000 FV. The entity had recorded a revaluation loss of $500,000 revaluation loss reported in Yr1. Solution:

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38
Q

Franchisee Accounting

A
  1. Initaial Franchise Fees: PV of the amount paid or to be paid by a franchisee is recorded as an intangible asset on BS and amortized over the expected life of the franchise.
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39
Q

Example: Peter signed an agreement to operate a franchise on 07-01-Yr1. Initial franchise fee was $75,000 and was paid by a $25,000 down payment with the balance payable in five equal annual payments of $10,000 beginning 07-01-Yr 2. The expected life of the franchise is 10 yrs. The PV of the five annual payment is $37,908.

A

The amount to be capitalized as an intangible asset on 07-01-Yr 1 is $25,000+$37,908 = $62,908. Journal entry to record@07-01-Yr1:

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40
Q

Start-up Costs

A

Expenses incurred in the formation of a corporation are considered organizational costs.

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41
Q

For Book purposes: Start-up costs, including organizational costs, should be expensed when incurred.

A

Example:

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42
Q

Example of costs DO NOT include in Start-up costs

A
  1. Routine, ongoing efforts to refine, enrich, improve the quality of existing products, services, processes & existing facility
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43
Q

For income Tax Purposes

A

A business may elect to deduct up to $5,000 each of org. expenditures and start-up costs.

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44
Q

PASS KEY

A

Remember that organizational exps are not capitalized as an intagible asset. Rather, they are expensed immediatly

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45
Q

Goodwill

A

Goodwill is the presentation of intangible resources and elements connected with an entity.

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46
Q

Calculation of Goodwill (No Amortization)

A
  1. Acquisition Method: Goodwill = Acquired entity’s FV - FV of the entity’s net assets including indentifiable intangible assets
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47
Q

Maintaining Goodwill

A

Cost associated with maintaining, devl, or restoring goodwill must be expensed.

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48
Q

Research and Development Costs

A

All must be expensed, but there are 2 exceptions(U.S.GAAP):

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49
Q

Items Not considered Research & Development

A
  1. Routine periodic design changes to old products or troubleshooting in production stage (these are manufacturing costs, not R & D expenses)
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50
Q

U.S.GAAP VS IFRS

A

Under IFRS, all reasearch costs must be expensed. The capitalized costs of the patent include the purchase price of the patent, the VAT taxes, and the legal cost to register the patent.

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51
Q

Technological Feasibility

A

Technological feasibility is established upon completion of:

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52
Q

Computer software Developed to be sold, Leased or Licesed

A
  1. Expense costs(prior to technological Feasibility): planning, design, coding, and testing.
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53
Q

Amortization of Capitalized software costs

A

Annual amortization (on a product by product basis) is the GREATER OF:

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54
Q

Computer software Developed internally or obtained for internal Use only

A
  1. Expense costs incurred for preliminary project state(before tech.feasibility) and costs incurred for training and maintenance.
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55
Q

***If change mind decided to sell to other

A

Proceeds received should be applied first to Carrying amount of the software, then recognized as Revenue.

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56
Q

Impairment of Intangible Assets with Finite Lives( Have estimated life): 2 steps

A

Step 1: compare Carrying Value to Undiscounted cash flows expected. If CV >FCF , then asset is Impaired (Using FCF)

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57
Q

Impairment of Intangible Assets with Indefinite lives (excluding Goodwill)

A

Step 2: If CV > FV, then Impairment lost = FV - CV

58
Q

Example: An Intangible asset : CV = $1,200,000, FV/PV net cash flows = $700,000. Net future cash flows projected = $1,000,000. Cost of disposal = $100,000.

A

FCF - CV = $1,000,000 - $1,200,000 =( $200,000) (impaired)

59
Q

Goodwill Impairment (U.S. GAAP)

A

Goodwill impairment is calculated at a reporting unit level

60
Q

Definition of Reporting Unit

A

A reporting unit is an operating segment, or one level below an operating segment. The goodwill of one reporting unit may be impaired but other may or may not be impaired.

61
Q

Evaluation of Goodwill Impairment

A

Step 1: Identify potential impairment by comparing the FV of each reporting unit with its CV, including goodwill. If impaired:

62
Q

Example: Omega has two reporting units, A and B which have book value including goodwill of $5000 and $6000, respectively A reports goodwill of $500, and B reports goodwill of $750. FV of A and B are $4,800 and $7000.

A

Step 1:

63
Q

Goodwill impairment calculation under IFRS

A

Goodwill impairment test under IFRS:

64
Q

Pass Key

A

It is important to note the following when testing a fixed asset or an intangible asset with a finite life for impairment:

65
Q

Completed contract method (U.S. GAAP only)

A

The completed contract method recognizes income only on completion (or substantial completion) of the contract.

66
Q

Balance Sheet presentation

A

Current Asset: The excess of accumulated cost over related billings.

67
Q

Requirements for using completed contract method

A

It is acceptable to use the completed contract method when:

68
Q

Advantages/Disadvantages of Completed contract method

A
  1. The primary advantages of the completed contract method is that it is based on final results rather than on estimates.
69
Q

Percentage-of -Completion Method (U.S. GAAP and IFRS)

A

It is appropriate to use the % of completion method when collection is assured and the entity’s accounting sys. can:

70
Q

Formula to calculate Gross Profit or Loss under Percentage of completion method

A

Step 1: Compute GP of completed contract

71
Q

***Important Note:

A

An estimated loss on the total contract is recognized immediately in the year it is discovered. However, any previous gross profit or loss reported in prior years must be adjusted for when calculating the total estimated loss.

72
Q

Balance Sheet presentation For % of completion method

A

Current Assets: Costs and Estimated earnings of uncompleted contracts in excess of progress billings.

73
Q

Advantages/Disadvantages of % of completion method

A

Advantages: The principle advantages of % of completion method are the accurate reporting of the status of the uncompleted contracts and the periodic recognition of income currently as contract are completed.

74
Q

Installment Sales

A

The installment method of accounting is used only when there is no reasonable basis for estimating the degree of collectibility.

75
Q

Gross profit

A

Gross profit = Sale - Cost of goods sold

76
Q

Gross profit percentage

A

Gross profit percentage = Gross profit /Sales revenue

77
Q

Earned Gross Profit

A

Earned Gross Profit = Cash collections x Gross profit percentage

78
Q

Deferred Gross Profit

A

Deferred Gross Profit = Installment receivable x Gross profit %

79
Q

Pass Key

A

Examiners require candidates to determine BS presentation:

80
Q

Exchanges for non-monetary asset

A

U.S.GAAP requires the exchanges for non-monetary asset to be classified into 2 group:

81
Q

Exchange with commercial substance

A

Any changes in cash flow resulted from the transaction. “Fair Value approach” is used.

82
Q

Pass Key

A

the FV of the asset given up is assumed to be equal the FV of asset received, including any CASH given or received.

83
Q

***Journal entry for exchange with commercial substance

A

DR: New asset (FV of consideration given)

84
Q

Recognize Gain/Loss

A

Gains and Losses are always recognized in exchange having commercial substance and are computed as the differences between FV and book value of the asset given up.

85
Q

Calculation of basis of Asset acquired:

A

FV of asset given up + Cash paid = Cost basis of Asset acquired.

86
Q

Example

A

Foxy company exchanged used cars for a building that could possibly become Foxy company’s storage space. Future cash flows will significantly change. the BV of the cars total $40,000(cost $102,000 - acc. dpr. of $62,000). The cars’ FV is $45,000. In addition, Foxy must pay $20,000 cash as part of the exchange.

87
Q

Calculate the gain/loss to be recognized on the exchange

A

FV - Book value = Gain/Loss

88
Q

Calculate the Basis of Acquired Asset

A

FV of asset given up + Cash paid = Cost basis of asset acquired

89
Q

Exchanges lacking commercial substance

A

If the projected cash flows after the exchange are not expected to change significantly, the the exchange lacks commercial substance.

90
Q

Gain

A
  1. No Boot is received = No Gain
91
Q

*** Boot is 25% or More of Total consideration

A

When the boot received equal or exceed 25% of the total consideration, both parties consider the transaction a monetary exchange and gains and losses are recognized in their entirety by both parties to the exchange.

92
Q

25% Rule

A

1.Total boot received/ Total consideration received

93
Q

Losses

A

If the transaction lacks commercial substance and a loss is indicated, the loss should be recognized.

94
Q

Pass Key

A
  1. Does it has commercial substance or not?
95
Q

Involuntary conversions

A

Whenever a non-monetary asset is involuntarily converted (e.g. fire loss, theft, or condemnation) to cash, the entire gain or loss is recognized for financial accounting purposes.

96
Q

Tax Treatment

A

The rules for involuntary conversions are different for tax purposes. If a gain is recognized for financial purposes in one period and for tax purposes in another period, a temporary difference will result.

97
Q

Journal entry: No boot = No gain recognized

A

DR: New asset received

98
Q

Journal entry: Boot is paid = No gain recognized

A

DR: New asset (Plug)

99
Q

Journal entry: Boot is received (

A

DR: New asset (Plug)

100
Q

Journal entry: Boot received (greater or equal 25% Rule) = All gain recognized

A

DR: New asset (Plug)

101
Q

Journal entry: Losses recognized in Full

A

DR: New asset (Plug)

102
Q

FINANCIAL REPORTING AND CHANGING PRICES

A

Under U.S.GAAP, certain large, publicly held companies may disclose information concerning the effect of changing prices.

103
Q

Historic cost

A

The actual exchange value in the dollars at that time an asset was acquired or a liability was assumed.

104
Q

Current Cost

A

The cost that would be incurred at the present time, the replacement cost. Use the recoverable amount if lower (Reflects appreciation)

105
Q

Nominal dollars

A

Unadjusted for changes in purchasing power (U.S.GAAP)

106
Q

Constant dollars

A

Dollars restated based on calculations of CPI ratios (adjusted for inflation).

107
Q

Measurement methods and current cost determination

A

There are four methods of measuring prices and the effects of price changes.

108
Q
  1. Historic Cost /Nominal Dollars ( HCND)
A

Is based on historic prices without restatement for changes in the purchasing power of the dollar. This method is the basis for GAAP used in the primary financial statements.

109
Q
  1. Historic Cost / Constant Dollars (HCCD)
A

Is based on historic prices adjusted for changes in the general purchasing power of the dollar. This method uses a general price index (e.g. Bureau of Labor Statistics Consumer Price index) to adjust historic cost; it retains the historic cost basis.

110
Q
  1. Current Cost / Nominal Dollars (CCND)
A

Is based on current cost without restatement for (or recognition to) changes in the general purchasing power of the dollar.

111
Q
  1. Current Cost / Constant Dollars (CCCD)
A

Is based on current cost adjusted for (giving recognition to) changes in the general purchasing power of the dollar. This method may use specific price indexes or direct pricing to determine current cost and will use a general price index to measure general purchasing power effects.

112
Q

Monetary (M)

A

Monetary A and L. are fixed “Constant” or denominated in $ regardless of changes in specific prices or the general price level(e.g. acct. receivable). Holding M assets during periods of inflation will result in a loss of purchasing power and holding M liabilities will result in a gain of p. power.

113
Q

Non-Monetary (N-M)

A

N-M (A) &(L) fluctuate in value w/ inflation and deflation. Holders of N-M items may lose or gain w/ the rise or fall of the CPI if the N-M item does not rise or fall in proportion to the change in the CPI. In another words, a N-M (A)or(L) is affected by (1) the rise or fall of the CPI and (2) the increase or decrease in the FV of the N-M item.

114
Q

Pass Key

A

A “contra-account” (allowance for doubtful accounts/acc. dpr.) is classified as monetary or nonmonetary based upon the classification of the related account.

115
Q

Functional currency: RULE #1

A

Rule: The functional currency of a company maybe:

116
Q

Functional currency: RULE #2

A

Rule: The functional currency of an entity generally depends upon the environment in which the entity generates and expends cash (unless there is a req.by law to use another currency), which may be any of the above 3. However, the functional currency cannot be the local currency if the foreign entity operates in a highly inflationary environment (i.e, approximately 100% over 3 years).

117
Q

Foreign Currency Transactions (reported on IS)

A

Foreign currency transactions are transactions with a foreign entity (e.g. buying from and selling to) denominated in (to be settled in) a foreign currency.

118
Q

Foreign currency Translation ( reported on OCI)

A

Foreign currency translation is the conversion of financial stmt of a foreign entity into financial stmt expressed in the domestic currency.

119
Q

Exchange Rate

A

Exchange rate is the price of one unit of a currency expressed in units of another currency.

120
Q

Direct method

A

The direct method is the domestic price of one unit of another currency. E.g. 1 euro = $1.47

121
Q

Indirect method

A

The indirect method is the foreign price of one unit of the domestic currency. E.g. 0.68 euros = $1

122
Q

Current Exchange Rate

A

Current exchange rate is the exchange rate at the current date, or for immediate delivery of currency, often referred to as the spot rate.

123
Q

Forward Exchange rate(Bet)

A

Forward exchange rate is the exchange rate existing now for exchanging two currencies at specific future date.

124
Q

Historical exchange rate (used for equity)

A

The historical exchange rate is the rate in effect at the date of issuance of stock or acquisition of assets.

125
Q

Weighted average rate (used for Income statement)

A

The weighted avg exchange rate is calc. to take into account the exchange rate fluctuations for the period. It would be impractical to account for the actual exchange rate in effect for numerous, recurring trans. (e.g.sale). The avg.rate, when applied to a tran. normally assumed to have occurred evenly throughout the period, approximates the effect of separate translations of each item.

126
Q

Forward Exchange Contract

A

A forward exchange contract is an agreement to exchange at a future specified date and rate a fixed amount of currencies of different countries.

127
Q

Denominated or Fixed in a currency

A

A transaction is denominated or fixed in the currency used to negotiate and settle the transaction, either in U.S. dollars or a foreign currency.

128
Q

Reporting Currency = U.S. $

A

The reporting currency is the currency of the entity ultimately reporting financial results of the foreign entity. (CPA exam = USD)

129
Q

Functional Currency

A

The functional currency is the currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency.

130
Q

Functional Currency: RULE #1

A

Rule: The functional currency of a company maybe:

131
Q

Functional Currency: RULE #2

A

Rule: The functional currency of an entity generally depends upon the environment in which the entity generates and expends cash (unless there is a req.by law to use another currency), which may be any of the above 3. However, the functional currency cannot be the local currency if the foreign entity operates in a highly inflationary environment (i.e, approximately 100% over 3 years).

132
Q

Foreign Currency Translation (Translation = Functional)

A

Foreign currency translation is the restatement of financial stmts denominated in the functional currency to the reporting currency using appropriate rates of exchange.

133
Q

( Remeasurement = Dysfunctional or highly inflationary)

A

Foreign currency remeasurement is the restatement of foreign financial stmts from the foreign currency to the entity’s functional currency in the following situations:

134
Q

Foreign Financial Statement Translation

A

B4 a parent company can consolidate the financial stmts of a foreign sub., the sub’s foreign currency financial stmts must be restated in the parent company’s reporting currency.

135
Q

Steps in Restating Foreign Financial Statements

A
  1. Prepare in Accordance with GAAP/IFRS
136
Q

Prepare in Accordance with GAAP/IFRS

A

B4 performing any part of the translation process, it is necessary to ensure that the financial stmts expressed in the foreign currency were prepared in accordance w/ U.S.GAAP or IFRS, as appropriate. If necessary, corrections must be made to comply with GAAP OR IFRS.

137
Q

Determine the Functional Currency

A

The func. currency of a foreign entity determines the conversion methodology to use. Under U.S.GAAP, an entity’s local currency qualifies as the func.currency if it is the currency of the primary eco. environment in which the company operates, and all of the following condition exist:

138
Q

Conditions ( don’t exist)

A

a. The foreign operations are relatively self-contained and integrated within the country.

139
Q

Determine Appropriate Exchange Rates

A

The func.currency of the foreign entity determines the exchange rates to be used in converting account balances and the treatment of the gains or losses associated with the translation process.

140
Q

Remeasure and/or Translate the Financial Statements

A
  1. Remeasurement Method
141
Q

Remeasurement Method (temporal method): if the financial stmts of the foreign sub are not in the sub’s func.currency, the financial stmts are remeasured to the func.currency starting with the balance sheet

A

(1) Balance Sheet:

142
Q

Translation Method (current rate method): if the financial stmts of the foreign sub are in the sub’s func.currency, the financial stmts are translated to the reporting currency starting with the income statement:

A

FOREIGN CURRENCY = FUNCTIONAL CURRENCY

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