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FAR 1-4 Flashcards

1
Q

What is the formula for Accounts Receivable Turnover?

A

A/R Turnover = Sales (net) / Average accounts receivable (net)

Indicates success in collecting outstanding receivables (higher=better)

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2
Q

What is the formula for Days Sales in A/R?

A

Days Sales in A/R= Ending A/R (net) / (Net sales/365)

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3
Q

What is a recognized subsequent event? What are some examples?

A

Provides info after the balance sheet date but before F/S are issued or available to be issued about conditions that existed at the B/S date

  • Settlement of Litigation
  • Loss on an uncollectible receivable (customer bankruptcy)
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4
Q

What is the subsequent event evaluation period for SEC filers? For non-filers?

A

SEC filers: through the date that the F/S are issued, meaning widely distributed (no disclosure required)

Non-filers: through the date that the F/S are available to be issued, meaning all approvals for issuance have been obtained (must disclose this date)

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5
Q

How do you apply the “Lower of Cost or Market” rule for inventory?

A
  1. Market = middle of these 3
    - Replacement cost: (given)
    - Ceiling: selling price - cost of disposal
    - Floor: net selling price (ceiling) - normal profit margin
  2. Take the lower of cost or market
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6
Q

How do you apply the “Lower of Cost and Net Realizable Value” rule for inventory?

A
  1. NRV = selling price - costs of completion

2. Take the lower of cost or NRV

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7
Q

What is the “most advantageous” market?

A

The market offering the best price after subtracting transaction costs

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8
Q

What are the components of Stockholders’ Equity?

A

Common stock
APIC
Retained Earnings

Note: Treasure stock and noncontrolling interests also impact SE

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9
Q

What are the components of Retained Earnings?

A

Beginning R/E
Net Income
(Dividends)

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10
Q

How are subsidiary balance sheet accounts reported?

A

They are adjusted to fair value on acquisition date

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11
Q

What are the steps in the Percentage-of-Completion Method?

A

Step 1: Contract price - Est. total cost = Gross profit
Step 2: Total cost to date / Total est. cost of contract
Step 3: Step 1 x Step 2 = Profit to date
Step 4: PTD at current fiscal-yr end - PTD at beg. of period = Current YTD GP

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12
Q

What is the “10 percent size test” for determining reportable segments?

A

Revenue (external, intersegment, or transfers), reported profit or loss, or assets are 10% of more of the combined total of all operating segments

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13
Q

How do you determine which costs are capitalized for computer software costs?

A

For computer software that is to be sold, leased, or licensed, costs may be capitalized once technological feasibility has been established.

*The costs will continue to be capitalized until the date the software is released for sale

(Costs before technological feasibility and after released for sale are EXPENSED)

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14
Q

What is the rule for major customer data?

A

The company should disclose if revenue from a single customer is 10% of more of total revenue

*Customer identity should not be disclosed

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15
Q

Name the reportable segment disclosures

A 
Identifying factors (of reportable segments)
Products and Services
Profit or Loss
Assets
Measurement Criteria
Reconciliations

Note: For disclosure questions you are unsure about, disclose the MOST rather than the least.

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16
Q

Consolidated F/S are prepared in recognition of the accounting concept of:

A

Economic entity

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17
Q

Which accounts related to intercompany sales must be eliminated for consolidated F/S?

A

Sales and COGS should be reduced by the intercompany sales.

Intercompany A/R and A/P must also be eliminated.

*If there is inventory on hand, an inventory adjustment is required (for gains remaining).

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18
Q

State how R&D costs are treated and its exceptions.

A

All R&D costs should be expensed when incurred EXCEPT for:

1) Equipment, facilities, materials with alternative future uses
2) R&D costs undertaken on behalf of others under contract

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19
Q

State how R&D costs are treated and its exceptions.

A

All R&D costs should be expensed when incurred EXCEPT for:

1) Equipment, facilities, materials with alternative future uses
2) R&D costs undertaken on behalf of others under contract

Note: Costs associated with alternative future uses will be capitalized, but the depreciation expense is allocated to R&D while the equipment is being used for R&D

Note: Legal fees to obtain/successfully defend a patent are capitalized as an intangible asset

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20
Q

Explain when costs related to fixed assets should be expensed and when they should be capitalized.

A

Additions, improvements, or replacements that increase quantity or usefulness should be capitalized. Extraordinary repairs that increase usefulness are also capitalized.

Ordinary repairs are expensed.

Note: Improvements/replacements and extraordinary repairs that increase life will reduce accumulated depreciation.

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21
Q

In the income statement, net income is reported-

A

NET of income tax (Income from cont. operations - Income taxes)

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22
Q

Where are items that are unusual or infrequent (or both) reported in the income statement?

A

Separately as part of income from continuing operations

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23
Q

Name the identifying qualities of the primary beneficiary of a Variable Interest Entity (VIEs)

A

The primary beneficiary has the power to direct the activities of a VIE and:

1. absorb the expected VIE losses; or    2. receive the expected VIE residual returns

Note: Ownership percentage does not matter

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24
Q

For a prior period adjustment, if comparative F/S are not presented, as of when is the cumulative effect of the change determined?

A

Adjustment to the opening balance of R/E (i.e. beginning of the year that is presented)

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25
For a prior period adjustment, if comparative F/S are presented, as of when is the cumulative effect of the change determined?
Adjustment to the beginning R/E of the earliest year presented
26
How do you determine the cumulative effect of a change in accounting principle?
= R/E at the beginning of period of the change - R/E would have been if change was applied to all affected prior periods
27
What is replacement cost?
Amount that would be paid to acquire or replace an asset currently. AKA acquisition cost
28
When should goodwill be tested for impairment? When should it not be?
Purchased goodwill is only tested for impairment in an acquisition of a controlling interest in another company. Any goodwill created in an investment accounted for under the equity method is neither amortized nor tested for impairment (ignored).
29
In a business combination, how should the excess of the acquisition price over the appraised values of the identifiable assets be reported?
As a gain, after adjusting balance sheet items to fair value
30
For revenue recognition, how are nonrefundable fees recognized?
They are recognized as revenue over the year Ex) If lease begins in September, the fees would be recognized over 4 months over the year
31
What is the formula for Inventory Turnover?
Inventory turnover = COGS / Average inventory *A/P is same, except denominator is Average A/P
32
What is the formula for Days in Inventory?
Days in Inventory = Ending Inventory / (COGS /365) *A/P calculated the same way, except numerator is End A/P
33
What is Form S-1?
AKA "registration statement", it is the initial registration form for public companies that want to issue new securities
34
What is Form 6-K filed for?
Filed semiannually by foreign private investors *Similar to Form 10-Q
35
What is Form 8-K filed for?
For major corporate events, such as acquisitions. *Nonfinancial data
36
What is Form 11-K?
The annual report of a company's employee benefit plans
37
What are Forms 20-F and 40-F?
40-F: filed by specific Canadian companies 20-F: filed by other non-U.S. registrants *Similar to Form 10-K
38
What are Forms 3,4, and 5 filed for?
Required for directors, officers, or beneficial owners of more than 10% of a class of equity securities of a registered company
39
What are examples of costs that are expensed in a business combination?
Legal fees and due diligence costs
40
What is the rule for expensing and capitalizing costs related to PP&E?
Expense ordinary repairs but capitalize expenditures, which are "additions" or "benefit several periods" or "improve efficiency"
41
How are collections recorded for service contracts (at the time of sale)?
As an increase in unearned revenue
42
How are items of Other Comprehensive Income (OCI) reported?
OCI items are reported NET of income tax
43
How is Comprehensive Income calculated and what is it?
Net Income (income from continuing operations AND loss from discontinued operations) + OCI (PUFIE, net of tax) = Comprehensive Income Comprehensive income is the change in equity from nonowner sources
44
Under the CECL model, how is credit loss calculated for held-to-maturity and AFS debt investments?
Credit loss = Amortized cost - PV *AFS: CL limited to amount by which FV < amortized cost. Also, amounts remaining after capped CL are NOT booked to OCI since the company has the option of selling at FV
45
Describe something unique to AFS securities when they are sold (compared to Trading, HTM)
Unrealized G/L related to AFS securities are REMOVED from AOCI when the investment is sold.
46
In the equity method, what is the journal entry for recording depreciation?
Dr: Equity in income xx Cr: Investment in Co. xx Note: opposite of recording income (offset to NI)
47
Describe what it means to calculate goodwill impairment on a reporting unit level.
Compare the CV of the reporting unit, including goodwill, to the FV of the reporting unit, including goodwill. Do NOT account for goodwill separately. Goodwill provided is used to determine how much impairment to record (limit- cannot have negative goodwill)
48
Why are reclassification entries necessary? (ex: govt w/DR and w/out DR & unrealized G/L in OCI)
To avoid double counting an item previously reported as comprehensive income (unrealized gain) which are now part of net income (realized gain)
49
What is the difference between factoring without recourse and factoring with recourse?
Factoring without recourse: transfers risk of uncollectible accounts to the buyer Factoring with recourse: leaves the risk of uncollectible accounts with the seller
50
What is the recoverability test and when is it used?
Determines if asset is impaired or not: Undiscounted future cash flows < CV = impaired *Only used for finite life assets
51
In a consolidated balance sheet, what must be accounted for in total stockholders' equity?
Common Stock APIC RE *Noncontrolling interest (including share of net income and dividends)
52
When returns cannot reasonably be estimated, when is revenue booked?
Once the return period has passed *Revenue will not be recognized for products that entities anticipate having to return.
53
How do you calculate the BS FV adjustment in an acquisition?
FV net assets - BV net assets = BS FV adjustment
54
What is the income approach for determining fair value?
Converting future amounts to a single discounted amount (discount rate)
55
What is the market approach for determining fair value?
Uses prices and other relevant info from market transactions involving identical or comparable assets or liabilities
56
What is the cost approach for determining fair value?
Uses current replacement cost
57
How are items held for sale classified on the balance sheet?
As current assets since they are expected to liquidated within one year.
58
What is the formula for the Quick Ratio?
Quick Ratio= (Cash and cash equivalents + Short-term marketable securities + Net receivables) / Current liabilities
59
What is the formula for Asset Turnover?
Asset Turnover = Sales (net) / Average total assets
60
What is the formula for Profit Margin?
Profit Margin= Net Income / Sales (net)
61
What is the formula for Return on Equity?
Return on Equity = Net Income/ Average total equity
62
What is the formula for Return on Sales?
Return on Sales = Income before interest income, interest expense, and taxes / Sales (net)
63
What is the formula for Operating Cash Flow Ratio?
Operating cash flow ratio = Cash flow from operations / Current liabilities
64
What is the formula for Total Debt Ratio?
Total Debt Ratio = Total liabilities / Total assets
65
What happens when the defense of an intangible asset is unsuccessful?
If defense is unsuccessful, then all costs related to it are expensed.
66
What occurs when a company pledges its receivables?
The assigning company (one pledging its receivables) will retain title to the receivables and will use the proceeds collected from the receivables to repay a loan
67
What is the formula for working capital?
Working Capital= Current assets - Current liabilities
68
What is the rule related to condemnation of a fixed asset?
When a fixed asset is sold (voluntarily or involuntarily) gain or loss is recognized (proceeds vs. CV) as part of income from continuing operations

FAR (3 decks)

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