F2 - Deck 3 Flashcards
What are the differences between Level 1, Level 2, and Level 3 valuations in fair value measurement?
Level 1 valuation is based on quoted prices in an active market for identical assets/liabilities.
Level 2 valuation uses observable or unobservable inputs other than quoted market prices, such as values of similar assets.
Level 3 valuation relies on unobservable inputs, reflecting the entity’s own judgments about market participant assumptions.
How do the reliability levels of fair value inputs differ?
Level 1 inputs, like quoted market prices on a stock exchange for an identical asset, are the most reliable. Level 2 inputs, such as quoted prices from a broker for a similar asset, are less reliable. Level 3 inputs, like the discounted cash flow of an entity’s operations, are the least reliable.
How are internally generated cash flow projections classified in fair value measurements?
Internally generated cash flow projections for a related asset or liability are classified as a Level 3 input because they are based on unobservable inputs reflecting a company’s own assumptions. In contrast, observable interest rates, quoted prices for similar assets in active markets, and quoted prices for identical assets in inactive markets are considered Level 2 inputs.
What are examples of Level 1, Level 2, and Level 3 inputs in fair value measurement?
Level 1 inputs are quoted prices in active markets for identical assets/liabilities with no adjustments needed. Level 2 inputs include quoted prices for similar assets/liabilities in active markets or inputs derived from observable market data. Level 3 inputs are based on the reporting entity’s internal data.
What are the key characteristics of OCBOA financial statements?
OCBOA financial statement titles should distinguish them from accrual basis statements. They include equivalents to the balance sheet and income statement, but a statement of cash flows is not required. Disclosures should be similar to GAAP, and the statements must report and explain changes to equity interests during the period.
What are acceptable titles for OCBOA financial statements?
OCBOA financial statements cannot use accrual basis titles. For the cash basis of accounting, “Statement of Cash and Equity” is equivalent to a balance sheet. “Statement of Assets and Liabilities Arising from Cash Transactions” is suitable for a modified cash basis. “Statement of Income - Income Tax Basis” is acceptable for an income tax basis financial statement.
What are special purpose frameworks and how do they differ from GAAP?
Special purpose frameworks are non-GAAP presentations and include the cash basis, modified cash basis, and tax basis of accounting. GAAP, International Financial Reporting Standards, and governmental accounting standards all require the use of the accrual basis of accounting for presenting financial statements.
What are examples of special purpose framework presentations versus U.S. GAAP required statements?
Special purpose frameworks include non-GAAP presentations like the cash basis and modified cash basis. “Statement of Cash Receipts and Disbursements” is a cash basis income statement. In contrast, “Statement of Operations” and “Statement of Financial Position” are required under U.S. GAAP, along with “Statement of Comprehensive Income” for companies with other comprehensive income.
How do you convert cash basis revenue to accrual basis revenue?
To convert cash basis revenue to accrual basis revenue, start with cash receipts from customers and make the following adjustments: add ending accounts receivable, subtract beginning accounts receivable, subtract ending unearned (or deferred) revenue, and add beginning unearned (or deferred) revenue.
What is one approach for converting from cash-basis to accrual-basis accounting?
To convert from cash-basis to accrual-basis accounting: Add increases in current assets, subtract decreases in current assets, add decreases in current liabilities, and subtract increases in current liabilities. These adjustments account for income and expenses recognized at different times under each accounting method.
Formula of Inventory Turnover:
COGS / Average Inventory
Formula of Debt-to-Equity ratio:
Total liabilities / Equity
Formula of Net Profit Margin:
Net income / Net sales
Formula of ROA:
Net income / Average total asset
Formula of DuPont:
(Net Income / Net Sales) = (Net Sales / Average total asset)
