FAR 1-11 Flashcards
What is a Prior Period Adjustment?
It can be a mathematical error that was made in the company’s previously issued financial statements. When the error is discovered, the prior financial statement must be restated.
What type of accounting changes and type will have what occurrences to the financial statements
Change in accounting principle, reporting entity and error correction will cause adjustment to be retrospective. While change in accounting estimate will be prospective
What is summary of significant accounting policies?
It is the description of the clients accounting principles and methods for items that have more than one approach under GAAP, not results.
What journal entries will be made to correct error in prior periods?
If the error effect the net income then it would be in other comprehensive income. Correction would be made to opening retained earnings for accumulated other comprehensive income.
What is the revenue test to determine if a segment is a reportable segment?
To be a reportable segment, the total revenue must be above 10% of revenue.
Major geographic areas
When should you recognize elements of a discontinued operation?
For operating income (loss) then you would recognized it in the period that it was earned.
Gain on sale then it will be recognized in the year it was disposed.
Loss on sale then it would be recognized immediately even if the disposal has not yet happened.
What categories is the statement of cashflow base on?
Three categories based on the nature of the cash flows:
- Operating - cash flows from normal business operations - Investing - cash flows from investing in yourself and others - Financing - cash flows from issuing and repaying debt or equity
What is the direct method and indirect method of cash flow?
Direct method is the cash effect that is reported to calculate cash-basis net income.
Indirect method is the non-cash items to calculate cash-base net income.
Starts with net income and reconciles (in or out) to the net cash flow
Under the cash basis of accounting understates net income by the net decrease during that account period of?
A decrease in Accts Receivable is reported as revenue under cash basis which will overstate the net income. A decrease in accrued expense (payable) is report as an expense under cash which will be an overstated expense which understates net income.
Interest payments on debt are reported under what cash flow activity?
It would be reported under operating activities. When direct method is used interest payments are listed as a cash outflow. If indirect method is used, interest expense is reflect in net income.
What are the steps when a partnership is liquidated?
- noncash assets are sold
- any gain or loss is allocated to the partners.
- liabilities are paid
The remaining cash is the distributed to the partners and any partner’s unpaid loan will reduce the cash paid to that partner
What are the three different methods when a new partner is admitted?
Bonus method - when the purchase price is different than the book value of the capital then bonus is adjust between the old and new partners
Goodwill method - goodwill is recognized based upon the total value of the partnership implied by the new partners contribution.
Exact method - no goodwill or bonus is recorded. The new partner’s capital is equal to the assets that is contributed.
What are the 3 categories of funds for governmental accounting?
Governmental funds - these are accounts for general and administrative activities and uses modified accrual accounting
Proprietary funds - accounts for business type activities and uses accrual accounting
Fiduciary funds - accounts for resources held by a government as a trust or agent for the benefit of others, uses accrual accounting
When is consolidated financial reporting required?
When one company has a controlling financial interest (greater than 50% ownership) in another entity. A parent company that owns more than 50% of a subsidiary controls the subsidiary and any company or companies in which the subsidiary also have controlling financial interest.
What accounting treatment should be used to account for investment transactions?
< 20% no significant influence - adjusted cost method (cost minus impairment losses)
20% to 50% significant influence - equity method
(investor will report equity in earnings or losses equal to the investor’s ownership percentage multiplied by the investee’s
income or loss for the period. Dividends received do not appear on the investor’s income statement, but they do reduce
the investment’s value on the balance sheet.)
> 50% controlling financial interest - consolidation
significant influence means the investor lacks controlling influence but has a concentration of share large enough to be prominent in the investee’s major decisions
