FAR 1

Question 1

Who writes GAAP?

Answer 1

FASB, a private sector body that is subject to scrutiny by the SEC. Board members must sever all ties with previous public accounting employers.

Question 2

Negative economic consequences refers to…

Answer 2

Potentially negative effects of proposed standards, including reduced ability to raise capital, and higher capital costs.

Question 3

When should conservative accounting be used?

Answer 3

Under conditions of uncertainty or where GAAP allows a choice of method.

Question 4

Does GAAP have compliance costs?

Answer 4

Cost should not exceed benefit, but some principles do impose significant compliance cost on firms.

Question 5

What reporting objective should GAAP favor?

Answer 5

None, GAAP should be neutral.

Question 6

Standards used to prepare financial statements?

Answer 6

GAAP, principles set by FASB. All companies must comply. SEC violation to depart from.

Question 7

Managerial accounting and financial accounting must follow GAAP?

Answer 7

False, only financial. Relevance and timeliness are important to both. Financial is primarily for investors (to allocate resources) and creditors.

Question 8

Can a firm restate financial statements?

Answer 8

Yes, when a material error is found or when a firm changes an accounting principle/method that must be applied retroactively.

Question 9

Procedure for issuing a new FASB statement?

Answer 9

Majority vote of proposed FASB statement. FASB statements cannot be rescinded by AICPA (a separate entity).

Question 10

Describe the EITF.

Answer 10

EMERGING ISSUES TASK FORCE developed by FASB to develop consensus about how to account for new financial transactions and events.

Question 11

What is an exposure draft?

Answer 11

A proposed new accounting standard (FASB statement). Preceded (comes before) by a discussion memorandum.

Question 12

The primary protection for investors against fraudulent financial reporting is…

Answer 12

The audit of financial statements by independent third parties.

Question 13

Cash basis accounting vs accrual accounting and the effects on income…

Answer 13

Accrual basis recognizes sales as earnings by recording A/R causing income to be overstated when compared to cash-basis income. Accrual basis recognizes expenses when incurred by recording an expense payable causing income to understated when compared to cash-basis income.

Question 14

How should nondeductible portion of expenses be reported on the financial statements when prepared on the income-tax basis?

Answer 14

As an expense (business expense) to determine income properly.

Question 15

How to convert from cash-basis to accrual basis for sales….

Answer 15

Adjust for change in A/R

Question 16

How to convert from accrual basis to cash basis when given income…(equation)

Answer 16

A = L + E
Change in A = Change in L + Change in E
[break assets down]
Change in cash + Change in other assets (OA) = same
[isolate cash]
Change in C = Change in L + Change in E - Change in OA
Change in C = Change in L - Change in OA
[can ignore equity]
[pay attention to signs, especially OA]

Question 17

List the five basic financial statements:

Answer 17

1. I/S
2. Stmt of Comprehensive Income
3. B/S
4. Stmt of Changes of S/H’s Equity
5. Stmt of Cash Flows

Question 18

I/S

Answer 18

Reports ACCRUAL-BASED performance at YE
Includes: revenues, expenses, gains/losses
Excludes: items included on Stmt of Comp Income

Question 19

Stmt. of Comp Income

Answer 19

Reports NON-OWNER equity changes at YE
Includes: unrealized gains/losses on investments in AFS (available-for-sale) securities, pension adjs., foreign currency translation adjs., hedge acc’ting adjs.

Question 20

B/S

Answer 20

Reports ECONOMIC RESOURCES and OBLIGATIONS at a specific date
Assets: reported in order of liquidity
Liabs: reported in order of maturity

Question 21

Stmt of S/H’s Equity

Answer 21

Reports CHANGES RELATED TO OWNERS’ EQUITY at YE
Presented in order of permanence:
1. Contributed capital - from owners, stays permanently - not returned to S/H’s
2. Retained earnings - shown last
Contributions made by owner’s and dividend paid by owner’s

Question 22

Stmt of Cash Flows

Answer 22

Reports CHANGES IN CASH at YE

Remember order of presentation: Operating, Investing, Financing [OH IF, I could pass the CPA Exam]

Question 23

Footnotes and Opinion

Answer 23

Footnotes: present info not captured on B/S I/S, how estimates are made
Opinion: Indicates if stmts are in conformity w/GAAP