F2 - Financial Reporting and Disclosures

Question 1

What is a bill-and-hold arrangement?

Answer 1

An agreement between an entity and a customer where a product has been completed, but is not to be delivered to the customer until a specified point in time. In the arrangement, the customer is billed (and revenue can be recognized.)

Note: The revenue is recognized when the product is complete/ready, NOT when the customer pays. Oftentimes this is due to the customer having inadequate space for the product.

Question 2

Is revenue from long-term construction contracts recognized over time or at a point in time?

Answer 2

It depends. If the construction company 1) does not control the asset (example: a building being improved that is NOT owned by the construction company) OR 2) has an unconditional right to payment for work completed to-date, then revenue is recognized over time.

Otherwise, revenue is recognized at a point in time.

Question 3

What are appropriated retained earnings?

Answer 3

Retained earnings set aside for a certain purpose. These are “unavailable” for paying dividends to shareholders.

Question 4

How do does a construction company recognize revenue over time?

Answer 4

It must determine % of completion (based on costs incurred & estimated) and multiply that by the estimated gross profit. Then it must subtract any profit that has been previously recognized.

Ex. $1MM contract
$.5MM total estimated costs
$.25MM project cost-to-date
(This indicates 50% completion)
$1MM LESS $.5MM = $.5MM estimated gross profit
$.5MM x 50% completion = $.25MM profit to-date
If .1MM profit has been previously recognized, then $.25MM LESS $.1MM = $.15MM remains to be recognized in the current period.

Question 5

If revenue is not recognized over time, at what point in time is it recognized?

Answer 5

When the customer obtains “control” of the asset.

Question 6

Does a construction company determine income based on costs incurred or billings to-date?

Answer 6

Costs incurred. (I.e. “construction in progress” - which is essentially an inventory asset account)

Note: if construction in progress PLUS estimated project earnings exceeds billings to-date, then that is considered a current asset (good news). If billings exceed the sum of construction in progress and estimated project earnings, then it is considered a current liability (bad news).

Question 7

When a construction company recognizes revenue over time, and they determine estimated costs the contract price, should they recognize the loss over time as well, should it all be recognized at a point in time upon contract completion, or should it be recognized immediately?

Answer 7

Immediately. Losses should be recognized in full in the year they are discovered.

Question 8

When a construction company recognizes revenue at a point in time, when should it be recognized?

Answer 8

It should be recognized when the contract is complete (this could be before it is paid).

Note: if estimated costs exceed the contract price, then the loss should be recognized immediately (regardless if the contract is complete).

Question 9

When an agent performs a function for a principal, when can it recognize the fee/commission revenue?

Answer 9

It can record the revenue after it performs the function even if the principal has not fulfilled its end of the contract.

Question 10

Consignment:

In a consignor/consignee relationship, which entity includes the unsold inventory on its books as an asset?

Answer 10

The consignor maintains unsold inventory on its books as an asset.

Note: the consignee will record commission revenue when the inventory is sold.

Question 11

If an item is sold together with a warranty at a price lower than the item and the warranty each sold separately? How is the accounting determined?

Answer 11

The Item and the warranty are recorded proportionally to their separate values.

Ex. Fridge (value of $40M) and warranty (value of $10M) are sold together for $45M.

Total value of items = $40M + $10M = $50M

Warranty is recorded at $45 x ($10/$50) = $9,000

Fridge is recorded at $45 x ($40/$50) = ($36,000)

Question 12

If a supplier sells its inventory to a retailer, and the retailer retains a right to return items for a period of time due to low demand, when can the company record the revenue?

Answer 12

If the amount of inventory returned CANNOT be reasonably estimated, then the company can record the revenue once the period of time for return has elapsed.

If the amount of inventory returned CAN be reasonably estimated, then the revenue can be recorded at the sales price LESS a refund liability of the estimated amount of returns.

Question 13

As a general rule, do changes in accounting estimates result in retrospective changes or prospective changes to the financial statements?

Answer 13

Changes in accounting estimates result in prospective changes to a company’s financials.

Question 14

As a general rule, do changes in accounting principles result in retrospective or prospective changes to a company’s financials?

Answer 14

Changes in accounting principles generally result in retrospective changes.

An exception is changes in principle that are inseparable from accounting estimates such as:
- LIFO
- Depreciation Method

Question 15

How are changes in accounting estimates treated?

Answer 15

Prospectively. (Going forward)

Note: when a change in principle is indistinguishable from a change in estimate, then it is treated as an estimate (prospective).
I.e.
- depreciation method
- a change TO LIFO

Question 16

How are changes in accounting principles treated?

Answer 16

Retrospectively - adjusting all prior periods presented.

Note: when a change in principle is indistinguishable from a change in estimate, then it is treated as an estimate (prospective).
I.e.
- depreciation method
- a change TO LIFO

Question 17

How are changes in entity accounted for?

Answer 17

Retrospectively.

Question 18

How are errors accounted for?

Answer 18

By restating prior periods. If comparative statements are not presented, the error correction should be reported as an adjustment to opening balance of RE (net of tax).

Note: neither cash basis nor income tax basis of accounting are GAAP (I.e. not “principles”), so they would be considered errors.

Question 19

If an accounting error has been made in a prior period, but no comparative financial statements are being presented, how should it be reported under GAAP?

Answer 19

In the retained earnings statement as an adjustment of the opening balance.

Question 20

What is a financing arrangement when an asset is sold to another entity?

Answer 20

A financing arrangement is a contract where the seller is obligated to repurchase the asset for a price above the selling price but below the market value of the asset.

Question 21

Can an entity change accounting principles for any reason?

Answer 21

No. An entity can only change accounting principles if:
1) it is required by GAAP or
2) if it is preferable and more fairly presents the information.

Question 22

If half of the period of a monthly lease expense has lapsed at year-end (I.e. lease period of 12/16/24 - 1/15/25), how much of the expense should be recorded as an accrued liability at year-end?

Answer 22

Roughly 50% of the monthly lease expense amount should be recorded as accrued liability, and 50% should be recorded as expense.

Question 23

What is an employee advance?

Answer 23

Money paid to an employee before it has been earned.

For instance, a salesperson might receive a salary before their commission has been calculated. Then, when the commission has been calculated (a payable on the employer’s books due later), then it will “pay off” the advance. Usually, if the commissions exceeds the advance, then the excess will be payable to the borrower, but if the commission is less than the advance, then the commission payable will be zero.

Question 24

What is a long-term bond-sinking fund?

Answer 24

A long-term bond sinking fund is a store of cash set aside for the repayment of future bonds and for the accrual of interest.

Note: this is NOT a current asset despite being cash.

Question 25

Construction Contracts (Revenue Recognition - % of Completion): When revenue is recognized, what is the entry to record the revenue/cost during the construction period?

Answer 25

Dr. Construction Expense ($ of costs incurred) Dr. Construction-in-progress (gross profit) Cr. Revenue (expense + gross profit)

Question 26

Construction Contracts (Revenue Recognition - % of Completion): How is Net Construction in Progress determined?

Answer 26

Net Construction in Progress is the balance of the construction-in-progress asset LESS progress Billings.

Question 27

Construction Contracts (Revenue Recognition - % of Completion): If a construction company recognizes revenue in year 1 of $100k and calculates that it will incur a gross loss in year 2 of $200k, what is the amount of loss to be recorded at the end of year 2?

Answer 27

A loss of $300k needs to be recognized in year 2. ($100k of revenue previously recognized LESS $300k = $200k loss on construction)

Question 28

Construction Contracts (Revenue Recognition - Completed Contract Method): What are the entries at the completion of a construction project? (Assume the project generated a profit)

Answer 28

Dr. Progress Billings (total amount of contract) Cr. Revenue (total amount of contract) Dr. Construction Expense (total costs costs incurred) Cr. Construction in Progress (total costs incurred)

Question 29

What are accrued expenses/liabilities?

Answer 29

Expenses incurred in the current period that remain unpaid.

Question 30

What are prepaid expenses?

Answer 30

Expenses paid (for future periods) but have not yet been incurred.

Question 31

Prepaid expense: What is an “annual premium”? (Insurance)

Answer 31

An annual premium is the $ amount to cover 1 year. Note, an insurance policy may be for >1 year, but the annual premium only acts as a prepaid expense for 1 year.

Question 32

How many months should be included in quarterly income statements per GAAP?

Answer 32

Only three (regardless of the quarter AKA not “cumulative”). This means that if a company follows a calendar year, income from January should NOT be included in Q3 net income.

Question 33

If a company is required to pay some fee for a license that is fully refundable by the state in five years, can it recognize the amount as a non-current asset assuming all tax returns have been filed and all taxes paid?

Answer 33

Yes.

Question 34

Notes to Financials: What is included in the Summary of Significant Accounting Policies?

Answer 34

A high-level overview of policies used by the company as opposed to detailed specifics that might be disclosed in more depth later on in the notes.

Question 35

Financial Statement Notes: If a company discusses depreciation method in its summary of significant accounting policies, and later has a note detailing depreciation of its assets, should it duplicate information regarding depreciation method?

Answer 35

No. Information stated in the summary of significant accounting policies should NOT be duplicated elsewhere in the notes.

Question 36

Financial Statement Notes: Under US GAAP, is it a note disclosure requirement to disclose a “probable” change of significant estimate in the future if it is not material?

Answer 36

No. Key language is “reasonably possible” not “probable.” Additionally, the effect of the change has to be material. Immaterial items are not disclosed.

Question 37

Financial Statement Notes - Subsequent Events: If a company refinances an upcoming debt maturity (current debt to long-term debt) subsequent to its year-end, but prior to issuance of its financial statements, should the liability be classified as short-term or long-term?

Answer 37

Long-term. If the debt payable exists at at year end, and the refinance occurs prior to issuance of financial statements, then it should be reclassified.

Question 38

Financial Statement Notes: If a majority of a company’s sales go to one customer, what should be disclosed regarding “current vulnerability due to certain concentrations”?

Answer 38

The volume of business transacted. This should be quantitative.

Question 39

Incremental cost of obtaining a contract: What are some examples of costs capitalized onto a contract (asset)?

Answer 39

- Legal fees for drawing up the contract - Commissions to sales employee Costs NOT capitalized include examples such as: - travel costs to deliver contract proposal - setup costs to set up a product associated with the contract - printing of materials such as manuals etc

Question 40

Subsequent Events: If a lawsuit arises AFTER the balance sheet date concerning events that occurred BEFORE the balance sheet date, should the estimated amount of the lawsuit liability be disclosed AND included in the financial statements?

Answer 40

Yes. Even though the lawsuit arose AFTER the balance sheet date, the “conditions” existed BEFORE the balance sheet date, so the journal entry should include the liability in the balance sheet AND the lawsuit should be disclosed.

Question 41

Subsequent Events: For an entity that does NOT file with the SEC, how should it determine its subsequent event period — AKA the date that the statements are “available to be issued.”

Answer 41

Statements are considered “available to be issued” when: - the financial statements are in a form and format that comply with GAAP - all approvals necessary for the issuance of the financial statements have been received

Question 42

Subsequent Events: For an entity that DOES file with the SEC, how should it determine its subsequent event period — AKA the date that the statements are “issued.”

Answer 42

Statements are considered “issued” when: - the financial statements are in a form and format that comply with GAAP - the financial statements have been widely distributed to users

Question 43

Subsequent Events: Are companies that file with the SEC required to disclose their subsequent event evaluation period?

Answer 43

No. Disclosure of the period of evaluation is not required for companies that file with the SEC.

Question 44

Subsequent Events: Are companies that do NOT file with the SEC required to disclose their subsequent event evaluation period?

Answer 44

Yes. The company must disclose the period of evaluation along with whether the end date was: - the date the statements were available to be issued or - the date that the statements were actually issued.

Question 45

Fair Value Measurements: Is the fair market value of stock the quoted price (before transaction costs) or the price net of transaction costs?

Answer 45

Before transaction costs. The transaction price CANNOT represent the fair value of an asset or liability at initial recognition if the transaction price includes transaction costs.

Question 46

Fair Value Measurements: When determining fair value of a stock based on two different stock exchanges, should you compare the quoted stock price (before transaction costs) or the net stock price (after transaction costs)?

Answer 46

If there is no “principal market” for the stock, then the NET stock prices (after transaction costs) should be evaluated to determine the most advantageous market. Once the most advantageous market is determined, the fair market value of the stock is the QUOTED price (before transaction costs) of the more advantageous market. Summary: Although transaction costs are not included in the fair value measurement, they are used to determine the most advantageous market (when there is no principal market).

Question 47

Fair Value Measurements: Is fair value measured as the price that would be PAID to receive an asset or the price that would be RECEIVED when selling as asset?

Answer 47

FV is the price that would be RECEIVED to sell an asset or PAID to transfer a liability in an orderly transaction between market participants at the measurement date under market conditions.

Question 48

Fair Value Measurements: Is fair value measured as the price that would be PAID when transferring a liability or the price that would be RECEIVED to assume a liability?

Answer 48

FV is the price that would be RECEIVED to sell an asset or PAID to transfer a liability in an orderly transaction between market participants at the measurement date under market conditions.

Question 49

Fair Value Measurements: When valuing certain financial instruments, if the fair value measurement option is elected, is it applied on a type-by-type basis (broadly) or an instrument-by-instrument basis (specifically)?

Answer 49

On an instrument-by-instrument basis. FV is measured for a specific asset/liability or a group of assets/liabilities. Once FV measurement is elected, it will be used until the asset/liability is disposed of.

Question 50

Fair Value Measurements: Which approach is better in determining fair value: the market approach or the cost approach?

Answer 50

The market approach is better. If the cost approach is utilized, it should maximize the use of observable inputs.

Question 51

Fair Value Measurement: What is the definition of Fair Value?

Answer 51

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 between market participants at the measurement date. Note: In the absence of a principal market, the most advantageous market is used.

Question 52

Fair Value Measurement: What are the three different valuation techniques used to measure fair value?

Answer 52

1. Market Approach 2. Income Approach 3. Cost Approach

Question 53

Fair Value Measurement: Explain the three levels of inputs to valuation techniques.

Answer 53

Level 1 - Quoted prices in active markets for IDENTICAL assets/liabilities that the entity has access to on the measurement date. Level 2 - Inputs other than quotes market prices that are directly or indirectly observable for the asset/liability. (This could be similar assets/liabilities in active markets, identical assets in inactive markets, etc.) Level 3 - Unobservable inputs for the asset/liability. Note: These “levels of inputs” do NOT necessarily correlate with the market approach, the income approach, and the cost approach.

Question 54

Special Purpose Frameworks - Cash Basis: If AP decreases from yr 1 to yr 2, how would this change affect accrual basis net income versus cash basis net income for the year?

Answer 54

This change would result in accrual basis net income being higher than cash basis net income. Under cash basis, a decrease in AP decreases net income. This is because cash basis treats money going out (AP decrease) as an expense. Under accrual basis, a decrease in AP has no effect on net income.

Question 55

Special Purpose Frameworks: What are some examples of common modifications used to prepare modified cash basis financial statements?

Answer 55

- Adjusting for depreciation/amortization expense - Capitalizing Inventory - Recording long-term liabilities - Accrual of income taxes

Question 56

Special Purpose Frameworks: Do Income Tax Basis and GAAP Financial statements recognize revenues and expenses in the same reporting periods?

Answer 56

Not always. Income Tax Basis recognizes events based on what shows up on the tax return. Non-taxable income and non-deductible expenses are shown on GAAP financials (and become M-1 adjustments to arrive at taxable income.)

Question 57

Special Purpose Frameworks: Does the income tax basis include nondeductible expenses in the expense category of the financial statements to determine income?

Answer 57

Yes. In financial statements prepared under income tax basis, nontaxable income and expenses should be recognized in the income and expense categories of the statements of revenues & expenses in order to determine income. Note: This can be in the period received/paid (cash basis) or in the period accruable (accrual basis)

Question 58

Special Purpose Frameworks: When converting cash basis revenue to accrual basis revenue, how are beginning and ending AR balances utilized?

Answer 58

An increase in AR is added to cash basis revenue to determine accrual basis revenue. A decrease in AR is subtracted from cash basis revenue to determine accrual basis revenue. So: Ending AR balance is added Beginning AR balance is subtracted

Question 59

Special Purpose Frameworks: When converting cash basis revenue to accrual basis revenue, how are beginning and ending unearned revenue balances utilized?

Answer 59

When unearned revenue increases, it must be subtracted from cash basis revenue to determine accrual basis revenue. (And a decrease should be added.) So: - Ending balance of Unearned Revenue should be subtracted - Beginning balance of Unearned Revenue should be added

Question 60

What kind of an account is contract liability?

Answer 60

Contract Liability is an unearned or deferred revenue account. It is also referred to as “customer deposits.”

Question 61

When an entity commits to selling a component, what portion of the operating losses for the year should be included in discontinued operations?

Answer 61

Regardless of when the entity decides to dispose of the component, ALL of its operating losses should be included in discontinued operations.

Question 62

Can bonds that are held to maturity be reported at fair value?

Answer 62

No. Bonds that are held to maturity should be reported at amortized cost.

Question 63

Can interest receivable be reported as a “trade receivable”? Can dividends receivable be reported as a “trade receivable”?

Answer 63

No. Interest Receivable and Dividends Receivable are considered non-trade receivables.

Question 64

Revenue Recognition: When items are sold as part of a package at a price lower than the items sold separately, how is the price allocated to each item?

Answer 64

The total price of the package should be allocated proportionally to each item in the package based on their individual respective prices “sold separately.” Ex. $10 item A and $15 item B sold in a package for $20. Amount of $20 allocated to Item A = $20 x $10/$25 = $8 Amount of $20 allocated to Item B = $20 x $15/$25 = $12

Question 65

Revenue Recognition: What is a call option, and how is it accounted for?

Answer 65

A call option is a contract between a buyer and a seller where the buyer has a right to repurchase an item it has sold. - If the agreed upon repurchase price is greater than or equal to the original selling price, it is a financing arrangement. - If the agreed upon repurchase price is less than the asset, it is a lease.

Question 66

Revenue Recognition: How is a sale accounted for when there is a call option that is a financing arrangement?

Answer 66

Dr. Cash for the original selling price Cr. Financial Liability Periodically, the difference between the repurchase price and the original selling price should be amortized as interest expense as follows: Dr. Interest Expense Cr. Financial Liability Once the repurchase period has lapsed, the interest expense should be fully amortized bringing the financial liability to the full agreed upon Repurchase price. If the call option is exercised, then the entry would be: Dr. Financial Liability @ repurchase price Cr. Cash @ repurchase price If the call option is not exercised, and expires, then the entry would be: Dr. Financial Liability Cr. Sales Revenue

Question 67

Special Purpose Frameworks: When converting cash basis expenses to accrual basis expenses, how are beginning and ending prepaid expenses utilized?

Answer 67

An increase in prepaid expenses inflates expenses under cash basis, so they should be subtracted when converting to accrual basis. A decrease underrepresents expenses under cash basis, so they should be added when converting to cash basis. So: - Ending balance prepaid expenses should be subtracted. - Beginning balance prepaid expenses should be added.

Question 68

Special Purpose Frameworks: When converting cash basis net income to accrual basis net income, how are current assets and current liabilities treated?

Answer 68

Converting Cash Basis NI to Accrual Basis NI: - When current assets increase, NI goes up. - When current assets decrease, NI goes down. - When current liabilities decrease, NI goes up. - When current liabilities increase, NI goes down.

Question 69

Revenue Recognition: What is a Put Option, and how is it accounted for?

Answer 69

A put option is an agreement between a buyer and a seller where the seller is obligated to repurchase the item sold at the buyer’s request. There are three categories of put options: 1. Lease - if the repurchase price is below the original selling price and the customer has a significant incentive to exercise. 2. Sale with a Right of Return - if the repurchase price is below the original selling price and/or the expected market value and the customer does NOT have significant incentive to exercise. 3. Financing Arrangement - if the repurchase price is greater than or equal to the original selling price AND the expected market value.

Question 70

What are the two common methods of estimating bad debt expense?

Answer 70

1. Percentage of receivables 2. Percentage of sales

Question 71

How do you calculate COGS?

Answer 71

COGS = Beginning Inventory (leftover purchases from prior periods) + Purchases (in current period) LESS Ending Inventory (cost of goods not yet sold)

Question 72

What is Net Sales?

Answer 72

Net Sales is the total revenue from sales less discounts, returns, and other deductions. Note: COGS is NOT used in determining net sales.

Question 73

What is DuPont return on assets?

Answer 73

DuPont Return on assets = Net profit margin x total asset turnover (Net Income / Net Sales) x (Net Sales / Avg Total Assets) Note: This calculation is indistinguishable from standard ROA (Net Income / avg total assets)

Question 74

What is total asset turnover?

Answer 74

Total Asset Turnover = Net Sales / Average Total Assets This is an efficiency ratio that evaluates how a company is able to use its assets to generate sales.

Question 75

If a change in accounting principle affects a balance sheet account, should all prior balance sheets be referenced to determine the cumulative effect of the change?

Answer 75

No. Because balance sheets show information at a point in time, the prior year’s balance sheet is sufficient for determining the cumulative effect of the change. Note: if the change in principle affects an income statement account, then all prior income statements will need to be referenced in order to determine the cumulative effect of the change.

Question 76

What is inventory turnover?

Answer 76

Inventory Turnover = COGS / avg inventory This is an efficiency ratio that evaluates how quickly a company is able to sell its inventory.

Question 77

What is Net Profit Margin?

Answer 77

Net Profit Margin = Net Income / Net Sales This is a profitability ratio that measures how much a company actually makes per dollar of sales.

Question 78

What is Return on Equity?

Answer 78

ROE = Net Income / Avg Total Equity This is a profitability ratio that show how well a company turns owner investment into earnings.

Question 79

What is “days sales in accounts receivable?”

Answer 79

Days Sales in AR = Ending Net AR / (Net Sales / 365) This is a Liquidity ratio that estimates the average number of days required to collect ending net AR based on prior period’s net sales. This formula says, “If we make x number of sales per day (in the denominator), then this is the number of days it will take to collect ending Net AR.”

Question 80

What is AR Turnover?

Answer 80

AR Turnover = Net Credit Sales / Avg Net AR This ratio indicates how quickly a company is able to collect its sales on account. Note: The denominator is NET AR, so AR LESS allowance for doubtful accounts.

Question 81

What is “days in Inventory”?

Answer 81

Days in Inventory = Ending Inventory / (COGS / 365) This ratio indicates roughly how many days it will take to sell ending inventory. This formula says, “If we keep up x rate of sales (in the denominator), then it will take this many days to empty out inventory.”

Question 82

What is Inventory Turnover?

Answer 82

Inventory Turnover = COGS / Avg Inventory This is an efficiency ratio that indicates how quickly a company sells & replaces inventory.

Question 83

What is gross profit margin?

Answer 83

Gross Profit Margin = Gross Profit (or Net Sales LESS COGS) / Net Sales This is a profitability ratio that measures how well a company manages its cost of producing goods or services.

Question 84

What is times interest earned?

Answer 84

Times Interest Earned (Interest Coverage Ratio) = EBIT / Interest Expense It shows lenders & other analysts how well an entity can cover its interest expenses.

Question 85

Is the level in the fair value hierarchy of a fair value measurement determined by the level of the HIGHEST level significant input?

Answer 85

No. The level in the fair value hierarchy of a fair value measurement is determined by the level of the LOWEST level significant input.

Question 86

When a company issues stock in exchange for professional services, should the credit to APIC be determined by the billing rate of the professional or the market value of the stock?

Answer 86

APIC should be determined by the market value of the stock as follows: APIC = fair value of stock LESS par value of stock

Question 87

When a company issues stock in exchange for professional services, should the credit to APIC be determined by the billing rate of the professional or the market value of the stock?

Answer 87

APIC should be determined by the market value of the stock as follows: APIC = fair value of stock LESS par value of stock

Question 88

If fair value a market-based measurement?

Answer 88

Yes.

Question 89

If fair value a market-based measurement?

Answer 89

Yes.

Question 90

When the purpose of appropriation is achieved, what is the treatment of appropriated retained earnings?

Answer 90

They are restored to RE. (In other words, any leftover “appropriated” amount is now “unappropriated.”)

Question 91

Is cash restricted for the retirement of bonds (bond sinking fund) necessarily appropriated Retained earnings?

Answer 91

Not necessarily. It can be, but would need to be explicitly mentioned in the question.

Question 92

If land is held as an investment or as part of PP&E, how should its value be recorded under GAAP?

Answer 92

Land should be recorded at historical cost regardless of intent of use.

Question 93

How should “Goodwill” be valued?

Answer 93

Goodwill is an indefinite-lived, intangible asset that is recorded at historical cost. Note: Annually, Goodwill should be tested for impairment. If the fair value is deemed to be less than the book value (historical cost), then an impairment loss is recorded down to the fair value.

Question 94

On what basis is the value of cash and cash equivalents measured?

Answer 94

Cash and cash equivalents (such as money market funds & CDs) are measured on the “fair value” measurement basis.

Question 95

What is working capital turnover?

Answer 95

Working Capital Turnover = Sales / (current assets — current liabilities)

Question 96

How do you calculate accrued salaries payable for a year?

Answer 96

Beginning Accrued Salaries Payable + Salaries Expense — Salaries paid = ending accrued salaries payable

Question 97

When determining interest expense and interest payable (current liability) on the balance sheet, do you include all interest due within a year or only interest that’s due as of the reporting period?

Answer 97

As of the reporting period. Interest expense is booked up to the end of the reporting period. A simultaneous entry to interest payable will also be booked at that time.

Question 98

What are some common noncash items included in modified cash basis statements?

Answer 98

Depreciation exp & AD, inventory & cogs, interest expense & payable, tax expense & payables.

Question 99

Are rummage sale & silent auction items of a fundraiser considered exchange transaction revenues?

Answer 99

No. These items would be considered to have nominal value and any proceeds would be considered contributions without donor restrictions.

Question 100

Does fair value include transportation and transaction costs?

Answer 100

No. It includes transportation, but not transaction costs.

Question 101

Is fair value determined by the principal market or most advantageous market?

Answer 101

Fair value measurement uses the principal market. If the principal market cannot be determined, the. The most advantageous is used.

Question 102

When are services (performance obligations) payable by the customer?

Answer 102

In accordance with the terms of the agreement… typically as services (or groups of like services) are delivered.

Question 103

Should major customers be disclosed in the notes to the financial statements?

Answer 103

GAAP does require disclosure of significant concentrations of revenue (such as major customer). Listing of specific customers by name however is not required.

Question 104

Are level 3 inputs acceptable under GAAP?

Answer 104

Yes, if no level 1 or 2 inputs are available or would be unreasonably expensive to determine.