FAR 1 Flashcards
Who are and are not the primary users of the financial statements?
Primary users: investors, creditors, lenders; NOT regulators
Who has a direct interest in the financials?
Company management/staff
Company suppliers or creditors
Investors or shareholders
Who has an indirect interest in the financials?
Financial advisors
Financial analysts
Stock exchanges
Regulatory bodies
Who are the external users of the financials?
Regulatory agencies
Investors
Creditors
Financial analysts
Who are the internal users of the financials?
Management
Board of Directors
Company employees
What are the two fundamental qualitative characteristics?
Relevance - “In order to confirm your relevance, you must predict trends in clothing material.”
Faithful representation - “When it comes to faith, being completely neutral will set you free.”
What are the three components of relevance?
“PCM”
Predictive value
Confirmatory value
Materiality
What are the three components of faithful representation?
“CNF”
Completeness
Neutrality
Freedom from error
What are the four enhancing qualitative characteristics?
“C-VUT”
Comparability
Verifiability
Understandability
Timeliness
What are the components of other comprehensive income?
“FUPIE”
Foreign currency translation gains or losses
Unrealized holding gains or losses on available-for-sale securities
Pension adjustments
Instrument-specific credit risk
Effective portion of cash flow hedges
What is the test for impairment?
Determine whether the carrying value is greater than the sum of the future net cash flows from the asset.
If yes:
Fair value (less costs to sell) - Book value = impairment loss if negative
What are some items included in the operating section of the statement of cash flows?
Dividends received
Interest received/paid
Purchase/sale of trading securities
What are some items included in the investing section of the statement of cash flows?
Purchase or sale of fixed assets
Loans made to other entities
Purchase or sale of AFS or HTM securities
Acquisition of a subsidiary or business unit under the equity or acquisition method
What are some items included in the financing section of the statement of cash flows?
Equity:
-Issuing common/preferred stock
-Treasury stock
-Dividend payments
Debt:
-Issuing bonds/notes
-Payments of principal on debt
What are the criteria for determining whether a lease should be classified as a finance or an operating lease?
“OWNES PC”
Finance lease for lessee/sales-type lease for lessor (only one has to be met):
1. Ownership transfers to lessee at end of lease term
2. Written/bargain purchase option lessee is reasonably certain to exercise
3. Net present value of minimum lease payments - 90% or more of leased property’s FV
4. Economic life - lease term is 75% or more of asset’s useful life
5. Specialized asset - no alternative use to lessor
Lessor uses PC to determine if direct financing or operating lease (both must be met):
6. PV of sum of lease payments (excluding lessee guaranteed residual value) and any third-party guaranteed residual value is equal to or substantially exceeds the underlying asset’s fair value
7. Collection of the lease payments is probable.
