FAR 1 Flashcards
First deck, testing few chapters
What period does Change in Estimates affect? And how to report it?
Change in Estimates affects only the current and subsequent periods (not prior and not R/E).
It is reported as a component of income from continuing operations.
When do the financial statements of all prior periods presented should be restated?
When there is a Change in Equity such as resulting from:
1. Changing companies in consolidated F/S
2. Consolidated F/S versus previous individual F/S
How should we treat a Change in Accounting Principle that is inseparable from the effect of a Change in Accounting Estimates?
A change in Accounting Principle that is inseparable from the effect of a Change in Accounting Estimate is now treated as a Change in Accounting Estimate.
How should we report a change from Cash Basis to Accrual Basis?
Cash Basis is not a GAAP accounting basis, so it would be a correction of an error if changed is made.
Direct method of exchange rate
Quoting the domestic price of a unit of another currency.
Ex: if Seller is US, it would be:
? USD = 1 Foreign Currency
Common mistake when doing exchange rate exercise
The provided amount is in foreign currency and also exchange rate table is in foreign currency. In this case, we need to change the whole table to our question currency.
Where do we include the prior service costs not previously recognized as a component of net periodic pensions costs?
This will be subtracted from the accumulated other comprehensive income or loss.
Which available-for-sale types are included in OCI?
Only available-for-sale debt securities is included in OCI, most of the other AFS should go to Net Income.
How does a company report its components of OCI?
The company has a choice of reporting the components of OCI on either an individual net of tax basis OR each component on a before-tax basis with one amount shown after for the aggregate tax effects.
Cost method vs. Legal (Par Value) method
The differences between Cost method and Par Value method are:
1. Cost method records Treasury Stock using their purchase price at that moment; However, Par Value method records the re-purchase using the par value given in the beginning. And using the original APIC/share (when issued the CS) to calculate its current APIC when re-purchasing. Then R/E is a plug.
2. Cost method separates between APIC-CS and APIC-TS; however, Par Value method only uses APIC-CS.
3. Using Par method, for re-issuing the Treasury Stock, we still use par value, APIC will be a plug.
APIC is a credit account. For cost method, when there’s no APIC. Where does it hit?
The retained earnings account.
What is a common mistake for Treasury Stock when doing SIM?
Entered as positive balance. Most of the time Treasury stock needs to be entered as NEGATIVE in SIM.
When is Change in Accounting Principal is not allowed?
A change in accounting principle only if required by GAAP or if the alternative is preferable and more fairly presents the information. If the company is changing its method because it expects COGS to decrease, improve Net Income, shareholder return, or stock price, then the change is not acceptable.
How to record Bad Debt Expense?
When debit bad debt expense, remember to credit Allowance for Doubtful Accounts. If the fund is uncollectible, then debit Allowance account and credit AR. By miracle, the customer paid, reverse prior entry, then normally record cash & AR entries.
For footnote, the summary of Significant Accounting Policies includes which disclosures?
- Measurement bases used in preparing the F/S.
- Specific accounting principles and methods used during the period, includes:
a) Basis of consolidation
b) Depreciation & amortization method.
c) Inventory pricing, use of estimates, fiscal year definition, special revenue recognition issues (e.g. long-term construction contracts, franchising, leasing oper.)
d) Criteria for determining which investments are treated as cash equivalents.
What information should be included in the Footnote Disclosures?
Footnote Disclosures should include information on changes in stockholders’ equity as well as any other information about significant asset and/or liability accounts.
When the Disclosure of Vulnerability to Concentration is required?
The Disclosure of Vulnerability to Concentration is required if all these criteria are met:
1. The concentration exits as the F/S date.
2. The concentration makes the entity vulnerable to the risk of a near-term severe impact.
3. And it it at least reasonably possible that the events that could cause impact occurs in the near-term.
How do we record bonds?
Bonds are recorded at Amortized Cost, not Fair Value.
What are major customers in reporting, and how to report them?
Major customers represent a significant % of revenue, we don’t mention them by name in the report (and notes), we don’t discuss the prior year, and we need to look at them every year to determine.
What are the two types of Subsequent Event?
- Recognized Subsequent Event: should be recorded and disclosed, settlement of litigation (arose before but settled after B/S date, but before F/S). Example: loss on an uncollectible receivable due to a client filing bankruptcy.
- Non-recognized Subsequent Event: did not exist at the B/S date, before the F/S date. This should be disclosed only (with estimated impact if possible). Issued C/S after B/S date, or fire destroyed a plant after B/S date.
Which type of entities need to disclose their subsequent event evaluation date?
Entities that file F/S with the SEC are not required to disclose the date of their subsequent event evaluation.
Entities that do not file F/S with the SEC are required to disclose both the subsequent event evaluation date and whether that date is the date the F/S was issued or available to be issued.
What is the new revenue recognition standard?
The new revenue recognition standard:
1. Identify the contract(s) with customers.
2. Identify the separate performance obligations.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognize revenue.
What are the three tiers of Fair Value method?
Level 1. Quoted price like from a stock market.
Level 2. Observable input (like a similar product)
Level 3. Unobservable input (like an estimation from internal or coming up with a model)
What if the repurchase price is higher than the original price for Re-purchase agreement?
If the re-purchase price is higher than the original, it is a credit financing liability.
Some very important measurements to remember
- Land as an investment always be recorded using Historical Cost.
- Goodwill needs to be tested for impairment every year, if it’s not impaired, use Historical Cost.
- Cash equivalent and stock are reported as Fair Value (to be a cash equivalent, the maturity date needs to be less than 90 days).
- Held-to-maturity will be recorded as amortized cost. When it was bought at par value, no discount/premium to amortize, so the cost will be the same.
- For intangible assets, if income approach is used, based on the project revenue, calculate the PV, and sum the total up.
Form 10-K
Form 10-K
1. Annually.
2. Large accelerated filers (700M up) have 60 days.
3. Accelerated filers (75-700M) have 75 days.
4. Small reporting entities (less than 75M) have 90 days.
5. Will include an audited F/S certified by the CEO and CFO. F/S will include notes, disclosures, schedules, a summary of financial data (current & prior years), and MD&A.
For 10-Q
Form 10-Q
1. Quarterly.
2. Large Accelerated and accelerated filers have 40 days.
3. Small reporting entities have 45 days.
4. Will include a reviewed interim F/S (this means inquiries and analytical procedures (not audited due to time).
5. Also include legal proceedings, charges in securities and indebtedness, matters submitted to shareholders for voters, exhibit of Form 8-K, and anticipated effect of new accounting principles.
Form 8-K
Form 8-K
1. On demand.
2. To report major corporate events such as corporate asset acquisitions or disposals, changes in securities and trading markets, changes to accountants of financial statements, changes in corporate governance or management.
