F2 Financial Reporting And Disclosures Flashcards
Significant accounting policies
The criteria for determining which investments are treated as cash equivalent would be part of the summary of significant accounting policies.
Summary of significant accounting policies in the notes to the financial statements
Revenue recognition policies
Information presented in notes to the financial statements
Information presented in notes to the financial statements have the purpose of providing disclosures required by GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. SFAC 5 para. 7
Quick Ratio Formula
= cash + cash equivalents + marketable securities + accounts receivable / total current liabilities
Level 3 input to valuation techniques used to measure the fair value of an asset
Unobservable inputs for the asset. For example, An assumed discount rate
What is fair value measurement.
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. It is a market-based measure.
Change in accounting estimates
It affects only the current and subsequent (future) periods, if the change affects both. It does not affect “prior periods”, nor “retained earnings”.
Total debt ratio formula or debt-to-asset formula
Total debt (total liabilities) / total assets
Days in inventory formula
Ending inventory / (cost of goods sold / 365)
Current ratio formula
Current assets / current liabilities
Change in reporting entity
If comparative financial statements are presented and a change of reporting entity has occurred, all previous financial statements that are presented in the comparative financial statements should be restated.
Debts-to-equity ratio formula
Total liabilities / total equity
Level 2 inputs
They are inputs other than quoted market prices that are directly or indirectly observable for the asset or liability. Level 2 inputs include quoted prices for similar assets or liabilities in active markets.
Special purpose frameworks
They are non-GAAP presentations that include other bases of accounting, such as the cash basis and modified cash basis. The statement of cash receipts and disbursements is an example of a cash basis income statement.
Accounts receivable turnover formula
Net sales (sales on credit - sales returns - sales allowances) / Average accounts receivable (starting and ending receivables dividing by 2)
What is the market approach
The market approach uses prices and other relevant information from market transactions involving identical or comparable assets/liabilities to measure fair value. The company is using comparable securities where pricing is available to estimate the fair value of the private placement securities.
Summary of significant accounting policies
It includes components such as: measurement bases, accounting principles and methods, criteria, and policies such as basis of consolidation, depreciation methods, revenue recognition, etc.
Fair value of a Nonfinancial assets
The fair value of a nonfinancial asset is the value at its highest and best use.
Return on Assets (ROA)
Net Income / Average Total Assets
Return on Equity (Formula)
(Net Income - Preferred Dividend) / Average Total Equity
Inventory Turnover (Formula)
Cost of Goods Sold / Average Inventory
Notes to Financial Statements
- Accounting Policies
- Detailed Information
- Financial Instruments and Risks
- Commitments and Contingencies
- Subsequent Events
- Related Party Transactions
- Changes in Accounting Principles and Estimates
Fair value
Fair value is an exit price, not an entrance price (i.e., sell an asset, not acquire an asset).
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.
Market participants
Market participants are buyers and sellers acting in their economic best interests who are independent (not related parties), who are knowledgeable about an asset or liability, and are willing and able to transact for that asset or liability.
Example: A company purchases real estate zoned for recreational use.
Form 10-Q
Part I:
Item 1 - Financial Statements
Item 2 - Management’s Discussion and Analysis
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Form 10-K
Part II:
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Item 8 - Financial Statements and Supplementary Data
Unrealized gains and losses
Rule: Unrealized gains and losses are reported as follows: trading debt securities are reported at fair value with unrealized gains and losses included in earnings (along with “realized” gains and losses, if any).
Where there are no expected credit losses, available-for-sale debt securities are reported at fair value with unrealized gains and losses reported as a separate component of other comprehensive income until realized.
Calculate Accrual basis from Cash basis
Formula:
Cash basis revenue
+ Ending AR
- Beginning AR
-Ending unearned revenue
+Beginning unearned revenue
=Accrual basis, revenue
Summary of significant accounting policies includes disclosures of:
- Measurement bases used in preparing the financial statements.
- Specific accounting principles and methods used during the period, including:
-Basis of consolidation
-Depreciation methods
-Amortization of intangibles
-Inventory pricing
-Use of estimates
-Fiscal year definition
-Special revenue recognition issues (e.g. long-term construction contracts, franchising, leasing operations, etc)
Criteria for determining which investments are treated as cash equivalents.
Output Method
Milestone achieved (Whether production or distribution) are an example of an output method used to recognize revenue.
Input Method
Resource consumption, labor hours expended, and costs incurred relative to total expected costs are all examples of input methods.
For purpose of determining the period over which subsequent events must be evaluated, financial statements are considered issued:
Financial statement are considered issued when:
-Financial statements are in a form and format that comply with GAAP.
-Financial statements have been widely distributed to financial statement users
Times Interest Earned
= Income before interest and taxes / Interest expense
or
= Earnings before interest and taxes / Interest expense
Special purpose framework
Balance sheet is called Statement of Financial Condition
