F2-NOTES Flashcards
How should freight out be accounted for?
Freight-out is a selling expense that should be accounted for as a period cost at the time incurred.
FREIGHT IN IS WHAT TYPE OF COST
INVENTORY COST
WHAT IS COST RECOVERY OF RECOGNIZING REVENUE?
IT WILL ONLY RECOGNIZE PROFIT AFTER ALL COSTS HAVE BEEN RECOVERED.
GROSS PROFIT FORMULA
GROSS PROFIT=SALES-COST OF SALES
GROSS PROFIT RATE FORMULA
GROSS PROFIT RATE = GROSS PROFIT/SALES
GROSS PROFIT ON INCOME STATEMENT FORMULA
GROSS PROFIT ON IS=CASH COLLECTIONS x GROSS PROFIT RATE
DEFERRED GROSS PROFIT FORMULA
DEFERRED GROSS PROFIT = GROSS PROFIT RATE x ENDING INSTALLMENT RECEIVABLE
What are the four criteria for revenue to be recognized in US GAAP?
- Persuasive evidence of an arrangement (signed contract)
- Delivery has occurred or services have been rendered (risk and rewards transfer)
- The prie is fixed and determinable (no price contingencies)
- Collection is reasonably assured (standard collection terms)
When is the revenue from the sales of products or the dispoal of other assets recognized?
On the date of sale
Under IFRS-
What conditions have to be met before the revenue from sale of goods is recognized?
- Revnue and costs incurred for the transaction can be measured reliably
- it is probable that economic benefits from the transaction will flow to the entity
- The entity has transferred to the buyer the significant risk and rewards of ownership
- The entity does not retain managerial involvement to the degree associated with ownership or control over the goods sold.
Under IFRS-
how is the revenue from rendering services recognized?
when the outcome is?
Using the precentage of completion method
of the transaction can be estimated reliably
Under IFRS-
The outcome of the transaction can be estimated reliably when all of the following conditions have been met:
- Revenue and costs incurred for the transaction can be measured reliably
- It is probably that economic benefit from the transaction will flow to the entity
- The stage of completion of the transaction at the end of the reporting period can be measured reliably
Under IFRS
Revenue from interest, royalties and dividends that arise from the use by others of the entity’s assets is recognized when all of the following conditions have been met:
- Revenue can be measured reliably
- It is probable economic benefits from the transaction will flow to the entity
Under IFRS-
Construction contracts can be estimated reliably when…
- The contract revenue and contracts costs attributable to the transaction can be measured reliably
- It is probable that economic benefits from the transaction will flow to the entity
- Both the contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably
Multiple Element Arrangements–
Notes
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.
What are deferred credits?
When cash is received before it is earned, a deferred credit (unearned revenue or deferred revenue) is reported. It is recognized as revenue when it is earned.
“Liability= Earn it or Return It”
What are expenses?
Reductions of assets or increases of liabilities (and possibly both) during a period of time.
They stem from rendering services, delivering of goods, or any other activites that may constitute the major ongoing or central operations of an entity.
Expenses should be recognized according to the matching principle.
What is realization?
Occurs when the entity obtains cash or the right to receive cash (i.e. from the sale of assets) or has converted a noncash resource into cash
“real world”
What is recognition?
Recognition is the actual recording of transactions and events in the FS
“record”
What is the matching principle?
One of the most important principles in financial accounting is the matching principle, which indicates that expense must be recognized (when it is practicable to do so). Matching revenues and costs is the simultaneous or combined recognition of the revenues and expenses that results directly and jointly from the same transactions or events.
What is accrual accounting?
Accrual Accounting is required by GAAP and is the process of employing the revenue recognition rule and the matching principle to the recotnition of revenues and expenses
“I/S impact/ No current cash impact”
Deferral-
Notes
Deferral of revenues and expenses will occur when cash is received or expended but is not recognizable for F/S purposes. Deferral typically results in the recognition of a liability or a prepaid expense.
What does the recognition of an accrued asset or accrued revenues?
Represents revenue recognized or earned through the passage of time (or other criteria) but not yet paid to the entity.
What does accrued liabilites or accrued expenses represent?
Expenses recognized or incurred through the passage of time (or other criteria) but not yet paid by the entity (e.g. accrued interest payable, accrued wages, etc.).
What does estimated laibilities represent?
The recognition of probable future charges that result from a prior act (e.g. the estimated liability for warranties, trading stamps or coupons).
What are expired cost?
Are costs that expire during the period and have no future benefit
- insurance expenses
- cost of goods sold are directly allocated to the periods in which the sales take place
- period costs
“Expense on I/S)
What are Unexpired Costs?
e.g. fixed assets and inventory
should be capitalized and matched against future revenues.
stay on BS (for now)
Where are deferred credits located?
Liability section of the B/S
When is royalty revenue is recognized?
When earned
What is unearned revenue?
Revenue received in advance is recorded as a liability because it is an obligation to perform a service in the future and is reported as revenue in the period in which it is eanted, that is when no further future service is required.
What are the conditions that have to be met for revenue recognition when the right of return exist?
- The sales price is substantially fixed at the date of the sale
- The buyer assumes all risks of loss (e.g. fire or theft) because the goods are considered in the buyer’s possession
- The buyer has paid some form of consideration
- The porduct sold is substantially complete and
- The amount of future returns can be reasonably estimated
When are the initial franchise fee recognized?
when “substantially performed”
When are continuing franchise fees recognized?
When Earned
What does substantial performance mean?
- Franchisor has no obligation to refund any payment (cash or otherwise) received
- Initial services required of the fanchisor have been performed
- All other conditions of the sale have been met
Classification of Intangible Assets
Notes
- Patents, copyrights, franchises, trademarks, and goodwill are common intangible assets tested on the CPA exam
- Intangible assets may be either specifically identifiable (e.g. patents, copyrights, franchise, etc.) or not specifically identifiable (e.g. Goodwill)
How should intangible assets be recorded?
At Cost
How should Internally Developed Intangible Assets be recorded?
Expensed against income
What costs associated with intangibles can be capitalized?
- Legal fees and other costs related to a successful defencse of the asset
- Registration or consulting fees
- Design costs (e.g. of a trademark)
- Other direct costs to secure the asset
- unsuccessful is expensed
- test asset for impairment
Capitalization of Costs
Cost is measured by:
- The amount of cash disbursed or the fair vaule of other assets distributed
- The present value of amounts to be paid for liabilities incurred; and
- The fair vaule of consdieration received for stock issued
Amortization of Intangible assets
Must have finite life
The value of intangible assets eventually disappears; therefore, the cost of each type of intangible asset (excpt for goodwill and assets with indefinite lives) should be amoritzed by systematic charges to income over the period estimated to be benefited.
What type of amortization for intangible assets?
straight line method
How is goodwill amortized?
No amortization-Indefinite life
The required approach is to test goodwill for impairment at least annually.
What happens during these miscellaneous rules of intangible assets…
- Worthlessness
- Impairment
- Change in useful life
- Sale
- Expense: Write off the entire remaining cost to expense if an intangible asset becomes worthless during the year
- Expense-Write down the intangible asset and recognize an impairment loss if an intangible asset becomes impaired
- Recalculate amortization- If the life of an existing intangible asset is reduced or extended, the remaining net book value is amortized over the new remaining life.
- Calculate G/L - If an intangbile asset is sold, simply compare its carrying value at the date of sale with the selling price to determin the gain or loss.
Under IFRS-
What are the 2 types of models that intangible assets can be reported? And there definitions.
Cost Model- intangible assets are reported at cost adjusted for amortization (finite life intangible assets only) and impairment
Revaluation Model- (=FV)- intangible assets are initially recognized at cost and then revaluated to fv at subsequent revaluation dates. Revaluated intangible assets are reported at fv on the revaluation date adjusted for subsequent amortization (finite life intangible assets only) and subsequent impairment.
Under IFRS- Revaluation Model
Where are revaluation Losses recorded?
What is the exception to this rule?
I/S
Revaluation loss that reverses a previously recognizred revaluation gain is recognized in OCI and reduces the revaluation surplus in AOCI.
Under IFRS- Revaluation Model
Where are revaluation gains recorded?
What is the exception to this rule?
OCI
Revaluation gains are reported on the I/S to the extent that they reverse a previously recognized revaluation loss.
Under IFRS- Revaluation Model
What happens when the revalued intangible assets subsequently beomes impaired?
If revalued intangible assets subsequently become impaired, the impairment is recorded by first reducing any revaluation surplus in equity to zero with further impairment losses reported on the I/S
Franchisee Accounting-
How do they account for initial franchise fee?
How do they account for continuing franchise fee?
Initial Franchise Fee- “Intangible asset and amortize”–recorded as an intangible asstet on the B/S and amortized over the expected period of benefit of the franchise (ie the expected life of the franchise)
Continuing Franchise Fee “Expense as Incurred”–Fees should be reported by the franchisee as an expense and as revenue by the franchisor, in the period incurred.
How are Start Up Costs accounted for?
Start-up costs, including organizational costs, should be expensed when incurred
“Expenses”
What is Goodwill?
Goodwill is the representation of intangible resources and elements connected with an entity (e.g. managment or marketing expretise or technical skill and knowledge that cannot be identified or valued separately)
How is Goodwill calculated under the Acquistion Method?
Goodwill is the excess of an aquired entity’s fair value over the fair value of the entity’s net assets, including identifiable intangible assets.
How is maintaining goodwill accounted for?
“Expense”
Costs associated with maintaining, developing, or restoring goodwill are not capitalized as goodwill (they are expensed). In addition, goodwill generated internally or not purchased in an arm’s length transaction is not capitalized as goodwill.
Under GAAP-
How do you account for Research and Development Costs?
What are the exceptions?
“Expense” - the only acceptable method of accounting for research and development costs is a direct charge to expense
Exceptions= “Don’t Expense”
- Materials, Equipment or Facilities (i.e., intangible assets) that have alternate future uses -Capitalize and depreciate the assets over thier useful lives
- Research and development costs of any nature undertaken on behalf of others under contractual agreement.
What items are not considered Research and Development?
- Routine periodic design changes to old products or troubleshooting in production stage
- Marketing Research
- Quality Control Testing
- Reformulation of a chemical compound
Computer Software Developed to be Sold, Leased or Licensed…
What is technological feasibility?
Technological feasibility is established upon completion of:
- A detailed program design
- Completion of a working model
How do you account for computer software developed to be sold, leased or licensed?
- Expense costs (planning, design, coding, and testing) incurred until technological feasibility has been established for the product
- Capital costs -“technological feasibility” – (coding, testing and producing product masters) incurred after technological feasbility has been established up to the point that the product is released for sale
- Inventory- Costs incurred to actually produce the product are product costs charged to inventory
How to account for Computer Software Internally or Obtained for Internal Use Only?
- Expense costs incurred for the preliminary project state and costs incurred for training and maintainance
- Capitalize costs incurred after the preliminary project state –“technological feasibility”
- Capitalize costs should be amortized on a straight line basis
- If software previously developed for internal use is subsequently sold to outsiders, proceeds received (e.g. from the license of computer software, net of incremental costs) should be applied first to the carrying amount of the software, then recognized as revenue (after the carrying amount of the software has reached zero).
Impairment–
Under GAAP–
How to test for impairment for an intangible asset with a finite life?
and with an indefinite life?
Finite Life= 2 step impairment test
- Determining the impairment- use undiscounted future net cash flows
- Amount of impairment - use FV (discounted cash flows)
Indefinite Life = 1 setp impairment test
Use step 2 as previously stated
How do you report an impairment loss of an impairment of intangible asset?
As a componenet of income from continuing operations.
Under GAAP-Goodwill Impairment
What is the approach?
What is a reporting unit?
Goodwill impairment is determined using a different approach. Goodwill impairment is calculated at a reporting unit level. Impairment exists when the carrying amount of the reporting unti goodwill exceeds its FV.
Reporting Unit- is an operating segment, or one leve below an operating segment – “Separate Cash Flows and Management reg reviews it”
What is the evaluation process of Goodwill impairment?
Step 1 - Identifiy potential impairment by comparing the FV of each reporting unit with its carrying amount, including goodwill. -
Step 2- Measure the amount of goodwill impairment loss by comparing the implied FV of the reporting unit’s goodwill with the carrying amount of that goodwill
What is the objective of correcting and adjusting accounts?
Match Expenses against related revenues
“Identify what is wrong and figure out how to correct it”
Under GAAP -
What is completed contract method for long-term construction contracts?
It is acceptable to use the completed contrace method for Long-Term Construction Contracts when:
Completed Contract Method: Recognizes income only on completion (or substantial completion) of the contract.
Requirements:
- It is difficult to estimate the costs of a contract in progress
- There are many contracts in progress so that about an equal number are completed in each year and an unequal recogntion of income does not result
- The projects are of short duration, and collections are not assured.
What is the B/S presentation of completed contract method under GAAP?
Excess of accumulated costs over related billings should be reflected in B/S as a current asset, and the excess of accumulated billings over related costs should be reflected as a current liability.
“Progress billings” and “construction in progress” are merely different accounts representing the same contract asset and should be shown net of their related contra accounts.
- Current Asset Accounts
- Due on accounts (receivable
- Cost of Uncompleted contracts in excess of progress billings(sometimes called “construction in progress”
or
- Current Liability Account-Progress billings on uncompleted contracts in excess of costs
How do you account for the Completed Contract Method?
“Net is a current asset or liability”
- Applicable overhead and direct costs should be charged to a construction in progress account (an asset)
- Billings and/or cash received should be credited to advances on construction in progress account (a liability)
- Losses should be recognized in full in the year they are discovered. “Rule of conservatism”
What is the determination of revenues recognized under the percentage of completion method of long term construction contracts?
That incurred costs to date bear to total estimated costs based on the most recent cost information
=Cost incurred/Total expected cost = work done/total expected work = % of job “earned”
What happens with losses of precentage of completion method?
A provision for the loss of the entire contract should be made when current estimates of the total contract costs indicate loss
What is the B/S presentation of percentage of completion method?
“Progree billings” and “construction-in-progress” are merely different accounts representing the same contract asset and should be shown net of their related contra accounts.
- Current Asset Accounts -
- Due on Accounts (receivable)
- Costs and estimated earnings of uncompleted contracts in excess of progress billings (sometimes called “construction in progress”) - “Larger than what you have billed customer
or
- Current Liability Account- progress billings in excess of cost and estimated earnings on uncompleted contracts
Accounting for estiimated losses on the presentage of completion method?
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 estimated loss
** See a lot on the EXAM***
What is Accounting for Installment sales?
Is used only when there is no reasonable basis for estimating the degree of collectibility. Under installment accounting, revenue is not recognized at the time a sale is made but rather when cash is actually collected.
“Cash Method”
Gross Profit Formula
Gross Profit = Sale - Cost of goods sold
Gross Profit Percentage Formula
Gross profit percentage = Gross profit / sales price
Earned gross profit formula
Earned Gross Profit = Cash Collection X Gross Profit Percentage
Deferred Gross Profit Formula
Deferred Gross Profit = Installment receivable X Gross profit percentage
What is the cost recovery method?
Under the cost recovery method, no profit is recognized on a sale until all costs have been recovered.
At the time of sale, the expected profit on the sale is recorded as deferred gross profit. Cash collections are first applied to the recovery of product costs. Collections after all cost have benn recovered are recognized as profit.
The cost recovery method is similar to the installment sales method because
It may only be used when receivables are collected over an extended period and there is no reasonable basis for estimateing their collectibility.
What are the 2 categories of nonmonetary exchanges?
- Those that have commercial substance – “G/L Recognized”
- Those that lack commercial substance – “ Loss recognized”
What makes a non monetary exchange have commercial substance?
If the future cash flows change as a result of the transaction. The change can either be in the areas of risk, timing, or amount of cash flows.
Record the transactoin at Fair Value
When is a nonmonetary exchange classifed as lacking commercial substance?
-No change in cash flows
or
-FV can’t be determined
What happens if there is a gain on exchanges lacking commercial substance?
What happens if there is a loss on exchanges lacking commercial substance?
Gain
- No Boot is received = no gain
- Boot is paid = no gain
- Boot is received = Recognize proportional gain (
Loss
Always recognize(different from tax)
How are involuntary conversions reported?
Whenenver a nonmonetary asset is involuntarily converted (e.g. fire loss, theft, or condemnation) to cash, the entire gain or loss is recognized for financial reporting purposes.
What is the definition of …
- Historical Cost
- Current Cost
Historic Cost- The actual exchange value in the dollars at that time an asset was acquired or a liability was assumed
Current Cost– The cost that would be incurred at the present time, the replacement cost. Use the recoverable amount if lower
“Difference = Appreciation”
What is the definition of
- Nominal Dollars
- Constant Dollars
- Nominal Dollars - Unadjusted for changes in purchasing power
- Constant Dollars – Dollars restated based on calculations of CPI ratios
“Inflation”
What is historic Cost/Nominal Cost?
HCND - 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 FS.
What is Historic Cost/Constant Dollar?
HCCD - is based on historic price adjusted for changes in the general purchasing power of the dollar. This method uses a general price index to adjust historic cost; it retains the historic cost basis.
What is the Current Cost/Nominal Dollars?
CCND- is based on current cost without restatement for (or recognition of) changes in the general purchasing power of the dollar
What is Current Cost/Constant Dollar?
CCCD- 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.
Notes on Monetary and Non-Monetary
Monetary- Monnetary assets and liabilties are fixed
Non-monetary assets and liabilities fluctuate in value with inflation and deflation
What are foreign currency transactions?
Foreign currency transactions are transactions with a foreign entity (e.g. buying from and selling to) denominated to (to be settled in) a foreign currency.
What are Foreign currency translations?
Foreign currency translations is the conversion of FS of a foreign entity into FS expressed in the domestic currency (the dollar)
What is Exchange Rate?
- Direct Method?
- Indirect Method?
Exchange rate is the price of one unit of a currency expressed in units of another currency
Direct Method- domestic price of one unit of another currency
Indirect Method- foreign price of one unit of the domestic currency
What is current exchange rate?
Is the exchange rate at the current date, or for immediate delivery of currency, often referred to as the spot rate
“=YR end/spot rate(typically used in BS)”
What is forward exchange rate?
“=Bet (we are betting the ex. rate will be this)”
Is the exchange rate existing now for exchanging 2 currencies at a specific future date
What is Historical Exchange rate?
“=used for equity”
Is the rate in effect at the date of issuance of stock or acquisition of assets
What is weighted average rate?
“=use for IS”
is calculated to take into account the exchange rate fluctuations for the period
What is reporting currency?
”= US $”
is the currency of the entity ultimately reporting financial results of the foreign entity
what is functional currency?
is the currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency
What is Foreign Currency Translation?
“Functional”
Is the restatement of FS denominated in the functional currency to the reporting currency using appropriate rates of exchange
What is foreign currency remeasurement?
“=Dysfunctional”
Is the restatement of the foreign FS from foreign currency to the reporting currency using appropriate rates of exchange
- The reporting currency is the functional currency
- The FS must be restated in the entity’s functional currency prior to translating the FS from the functional currency to the reporting currency
Under GAAP- An entity’s local currency qualifies as the functional currency if it is the currency of the primary economic environment n which the company operates, and all of the following conditions exist:
- The foreign operations are relatively self-contained and integrated within the country
- The day-to-day operations do not depend on the parent’s or investor’s functional currency
- The local economy of the foreign entity is not highly inflationary, which is defined as cumulative inflation of 100% over 3 years.
What are Other Comprehensive Bases of Accounting (OCBOA)?
- The cash basis
- The tax basis
- A definite set of criteria have substantal support
- A regulatory basis
What are general OCBOA Presentation Guidelines?
- FS titles should differentiate the OCBOA FS from accrual FS
- FS should explain changes in equity
- A statement of cash flows is not required
What is cash basis accounting?
Revenues are recognized when cash is received and expenses are recognized when cash is paid
-Cash is the only asset, no liabilities are recorded and equity is equal to cash
What are common modifications to cash basis?
- Capitalizing and depreciating fixed assets
- Accrual of income taxes
- Recording liabilities for long-term and short-term borrowings and related interest expense
- Capitalizing inventory
- Reporting investments at FV and recognizing unrealized G/L
Under Tax Basis Accounting how may the nontaxable revenues and expenses be reported as:
- Separate line items in the rev and exp sections of the statement of rev and exp
- Additions and deductions to net income
- A disclosure in a note
