Far 1 Flashcards
When is revenue recognized in the Completed Contract method?
Revenue is only recognized when the contract/job is completed
BUT, expected losses are recognized immediately
When is revenue recognized in the Percentage of Completion method?
Income previously recognized would be used to find income recognized in the second year.
% completion formula: Total cost to date/ Total estimated costs of contract
Estimated losses are recognized immediately in the year it is discovered
Using the Percentage of Completion method, how do you recognize gross profit for a year?
Start with the contract price and subtract the cumulative actual costs + the estimated remaining costs (so all the costs). This gets you to the Estimated Gross Profit.
You then use the % completion formula.. which is: Total actual costs/total estimated+actual costs…
Multiply the estimated gross profit by the completion % to get the current year gross profit to be recognized.
If there is income previously recognized, then subtract it from the current year Gross Profit.
“Other Comprehensive Income” Items are NOT included in Net Income
- unrealized gains or losses on AFS securities
- unrecognized gains or losses from pension costs
- foreign currency translation adjustments
- unrealized gains or losses from certain derivative transactions.
Comprehensive income includes all changes in equity EXCEPT
- investments by owners AND
- distributions to owners
“Accumulated Other Comprehensive Income” (AOCI)
Reported in the shareholders equity section of the Balance sheet (statement of Financial position)
The “Other Comprehensive Income” items are accumulated there until the gain is realized (like until the AFS security is actually sold)
Reclassification adjustments must be shown so you don’t double count comprehensive income items
“Significant Accounting Policies” section in the Notes to F/S includes….
- revenue recognition policies
- how a company determines what investments are cash equivilents
- how a company prices their inventory
- methods for amortizing intangibles
- basis of consolidation
- depreciation methods
- measurement bases
- accounting principles and methods
Research & Development and Software Costs
Under GAAP….
All R&D costs are expensed…
Once software reaches technological feasibility these costs are capitalized…
Once the product is on the market and being sold…
costs are then amortized
Under IFRS..
Research costs are expensed BUT Development costs are capitalized
Subsequent Events
Events that occur after the Balance sheet date but before F/S are issued
TWO TYPES:
1. Recognized events: items that did exist at the B/S date but are somehow discovered after the B/S date so these require recognition in the Financial Statements
- Unrecognized events: Items that did not exist at the B/S date but they do require disclosure in the Footnotes-material items
Fair Value Measurement when there is NO Principal Market
The price is the most advantageous market is the Fair Value Measurement.
The most advantageous market is the market with the best price (higher price) after subtracting the transaction costs.
ex. Market A= 1,000-75=925
Market B=1,050-150=900
soon 925 is a more advantageous market price so 1,000 is the Fair Value of the Financial Asset.
Net Realizable Value (NRV)
Selling Price-Any Completion Costs= NRV
Fair Value of an Asset
The price the would be received if you sell an asset in an active market
Fair Value is a market specific measure. The FV of an asset or liability is specific to the market making the FV measurement
FV includes transportation costs but not transaction costs
The “Principal” Market
The Market with the greatest amount of volume for the particular asset for which FV is being determined
Levels of the Fair Value Heirarchy (3 levels)
Level 1: Quoted Market Prices in an active market for IDENTICAL items. HIGHEST quality/MOST RELIABLE
ex. shares of stock publicly traded on exchanges
Level 2: OBSERVABLE inputs that don’t meet all requirements for Level 1. Quoted prices in active markets for SIMILAR items. Quoted prices in markets that are not active.
Level 3: UNOBSERVABLE inputs for the item being valued.
LOWEST level with the least desirable inputs.
Usually based on the reporting firms INTERNAL DATA.
-Projected cash flows
-Discounted cash flow of firm
-Historical performance + return of investment
Fair Value is a ______ based measurement
Fair Value is a MARKET BASED measurement
Fair Value can be applied through an _________________ basis.
FV can be applied through an INSTRUMENT-BY-INSTRUMENT basis
Earnings Per Share (EPS) Formula
Net income- Preferred Stock Dividends/ Weighted Avg. # of Outstanding Common Shares
Outstanding shares is how long they were in the year.. what month were the shares put place to make sure they are weighted correctly
Segment Reporting
-When a public company is reporting revenues from its reporting segments….
Unaffiliated customers sales and intracompany sales MUST be disclosed SEPARATELY.
-Only publicly traded enterprises are required to report on business segments.
- If a segment has at least 10% of the total of…
-COMBINED revenues
-operating profits - OR assets of the company
….then they are REPORTABLE segments - A customer is considered to be a major customer if sales to the customer are at LEAST 10% of total revenue, not 10% of combined assets.
- Sales to other segments will always be used in determining a segment’s operating income
- BOTH profit/ losses and total assets for each reportable operating segment should be disclosed under U.S. GAAP.
SEC (Public Company) Reporting Requirements
- Generally Accepted Accounting Principles that were used in the MOST RECENT ANNUAL REPORT of an enterprise should be applied to the INTERIM FINANCIAL STATEMENTS of the current year.
- For interim reporting purposes, costs that benefit multiple periods should be allocated equally to those periods.
- An entity’s annual financial statements filed with the SEC should include:
- a minimum of 2 BALANCE SHEETS, 3 income statements, 3 changes in owners equity, 3 cash flows
-Regulation S-X:
Sets forth the form and content of and requirements for interim and annual F/S to be filed with the SEC
-The entire amount of a gain or loss from sale of fixed assets should be reported during the QUARTER incurred.
10K
10Q
8K
10K is the annual filing that must be audited by an independent auditor
3 Filer Types :
1. Large Accelerated Filer: is a company with $700 million or more. Needs to file a 10k within 60 days, a 10Q within 40 days.
- Accelerated Filer: A
company with market value between $75-700 million needs to file 10k within 75 days, 10Q within 40 days. - NonAccelerated Filer: Less than $75 million. 10k needs to be filed within 90 days, a 10Q within 45 days.
10Q: Quarterly filing of results of operation and financial condition and is NOT audited, but reviewed by auditor. The end of the preceding fiscal year balance sheet is required on the 10Q.
8K: For significant events that happen in between 10K and 10Q’s. Like bankruptcy, departure of a CEO, change in accountants.
The MD&A (Managements Discussion and Analysis) is NOT required to be presented in an exhibit prepared using XBRL
The SEC requires a U.S. public company submitting a 10K to present F/S, balance sheets, income statements, statement of comprehensive income, and all footnotes.
Form 20-F, 11-K, 40-F and 10K all include a set of Financial statements.
Forms 6-K and 10Q do not include audited F/S
Special purpose frameworks
When preparing statements based on an “Other Comprehensive Income Basis of Accounting” (OCBOA), the statement of cash flows is usually not prepared.
The important thing is that the statements are descriptive about what basis of accounting has been used.
Under CASH BASIS of accounting, revenue/cash is not recorded until received, and expenses are recorded when cash is paid, so increases in Accounts Recievable are subtracted for cash basis, and decrease in Accounts Payable are subtracted for cash basis.
The decrease in prepaid interest is ADDED when calculating accrual basis interest expense because a…….. DECREASE in PREPAID INTEREST INCREASES INTEREST EXPENSE.
A decrease in interest payable is SUBTRACTED when calculating accrual basis interest expense because…………a DECREASE IN INTEREST PAYABLE IMPLIES that cash interest payments exceeded accrual basis expense.
Decrease in prepaid interest INCREASES _____
INTEREST EXPENSE
Decrease in Interest Payable DECREASES_________
INTEREST EXPENSE
Interest Expense is reported on a cash basis in the Statement of Cash Flows, and on an accrual basis in the income statement. Sooooooo… when finding the interest expense for an income statement…
you have to convert the cash basis to accrual basis …
start with cash basis interest expense
+ Decrease in Prepaid interest
-Decrease in Interest Payable
=Accrual basis Interest Expense
OCBOA financial statements CANNOT use Accrual Basis titles. What is an example of a title that would not be appropriate?
Statement of Financial Position is an accrual basis title so OCBOA would not be appropriate. ONLY CASH BASIS titles
Modified Cash Basis
Cash Basis with a few elements of Accrual basis.
Recording Long-Term Liabilities, accrual of income taxes, and capitalization of inventory are all common modifications made to for modified cash basis F/S
The Cash basis of accounting understates income by the net decrease in…..
Accrued Expenses
Decrease in Accounts Recieveable
Represents cash paid in in the current period on Accounts Receivable from prior periods. Under Cash Basis, the decrease in accounts receivable would be recorded as current period income, but under the accrual basis, the revenue would have been recorded in prior periods.
Increase in Accounts Payable
Represents expenses incurred but not yet paid.. Under the cash basis, no expense would be recorded for the increase in accounts payable because cash has not yet been paid. Under the accrual basis, expenses totaling the increase accounts payable are recorded when the payables are recorded.
Accrual Basis
ADD: Decrease in accounts payable
SUBTRACT: Decrease in accounts receiveable
Prepaid expenses
Represent assets where no benefit has been received yet. In accrual Accounting, they are not officially expenses until there is an associated benefit so you would subtract these from cash basis to get to accrual basis.
Accrued liabilities
Represents benefit received but no cash paid out yet. You would add accrued liabilities under accrual basis.
Accrual base revenue
Will count all sales applicable to that year regardless of when they are collected
Accrual Basis
for Net Income
ADD: Decrease in accounts payable
SUBTRACT: Decrease in accounts receivable
ADD: Increase in accounts receivable
SUBTRACT: Decrease in prepaid expenses
SUBTRACT: Increase in prepaid expenses
SUBTRACT: Decrease in Accrued liabilities
ADD: Decrease in Unearned fees
Current Ratio
Current Assets/
Current Liabilities
Current Assets=cash, A/R, inventory, short term securities
*For A/R, if you are given Allowance 4 Doubtful Accounts, you must subtract that from A/R
(PP&E is not a current asset)
Quick Ratio
Current Assets- Inventory/
Current Liabilities
Debt to Equity Ratio
Total Liabilities/
Shareholders Equity
Total Liabilites=Assets-Equity
Shareholders Equity=Capital Stock+ Retained Earnings
Operating Cycle Ratio
A/R turnover in Days + Inventory turnover in Days
A/R in Days=
365/ A/R Turnover Ratio
A/R Turnover Ratio
Net Credit Sales/
Average Net Recieveables
(which is the average between the beginning of the year and the end of the year balances of A/R)
Inventory Turnover Ratio
COGS/
Average Inventory
(which is the average between the beginning of the year and the end of the year inventory)
Inventory Turnover in days=
365/Inventory Turnover Ratio
COGS
Beginning inventory \+Purchases= Goods Available for Sale -Ending Inventory= COGS
Working Capital
Total Current Assets -Total Current Liabilities
Working Capital Turnover=
Sales/ Average Working Capital
Cash Ratio
(Cash+Cash Equivalents+Marketable Securities) /
Current Liabilities
Net Profit Margin Ratio
Net Income/
Net Sales
*If Inventory is sold at cost, then net income does not change but net sales increases. Therefore, the numerator does not change but the denominator increases, cause the net margin profit ratio to decrease.
A sale of inventory does not affect net income, but a sale of inventory does affect net sales
Common Return on Equity Ratio
Net Income-preferred dividends/
Average Common Equity
Total Asset Turnover Ratio
Net Sales/
Average Total Assets
Return on Assets Ratio
Net Income/
Average Total Assets
“Times Interest Earned”
Net Income before taxes +Interest/
Interest
An increase would be considered beneficial. The greater it is the less risk of bankruptcy
Operating Cash Flow to Total Debt Ratio
Operating Cash Flow (given)/
Total liabilities
Partnerships
Assets contributed by partners to a partnership are valued at FMV of the assets, net of any related liabilities.
ex. FMV of the property contributed less the mortgage payable associated with the property
-A partners capital account balance is the FMV of the equipment/property donated
The partners capital account would be credited for the FMV of property at date of contribution.
Under the BONUS method, a partners capital account balance is….
the existing capital balances of the existing partners
+the FMV of the partners investment donated=
the NEW PARTNERSHIPS
capital balances
x the new partners capital interest %
=The new partners capital balance
*The bonus method increases or decreases the individual partners accounts without changing the total net assets of the partnership.
*Under the bonus method, any premium paid to the retiring partner is allocated to the remaining partners accounts.
*The goodwill method increases the individual partners accounts and also changes the total net assets of the partnership.
To find the GOODWILL to the original partners..
the new partners investment/ their ownership %
=New partners Total capital..
the difference between that and the total assets of partnership is the goodwill
-Partners contributions to the partnership are valued at the FMV at the date of contribution of the non cash property contributed.
-Partners old profit and loss ratios should be used to allocate excess of a admittance of new partner.
Capital ratios are ineffective
to reflect the operating effectiveness of the old partners.
Additional Paid in Capital (APIC)
Assets (Fair value)
-Liabilities (Fair value)
-Common Stock (# of shares x par value)
=Additonal Paid in Capital (APIC)
JOURNAL ENTRY
Assets (FV) X
Liabilities (FV) X
Common Stock X
Additional Paid in Capital X
Revenue Recognition
Recognize revenue when the entity satisfies the performance obligation, or when the goods or services have been provided to the customer
-OR there is a reasonable assurance that the receivables will be collected
Recognizing Revenue Over time- INPUT AND OUTPUT METHOD
Input Method: very similar to the percentage of completion method. Recognizes revenue based on satisfying the performance obligation relative to the total performance obligation to be performed- ex. recognizing revenue on a construction project as costs are incurred relative to the total estimated cost to finish the project
Output Method: Output method recognizes revenue based on the value transferred to the customer relative to the total value to be transferred. These are things such as units produced or delivered
Compensation and Benefits
Compensated Absences-this is the account that accrues the expense for paid days off for employees
ex. ABC gives their 10 employees 10 paid vacation days each year. Each employee makes an average of $100 per day. ABC estimates that 80% of the days will be used this year, and the remaining 20% the following year:
Vacation Expense $10,000
Vacation Days Payable-current $8,000
Vacation Days Payable-noncurrent $2,000
Defined Benefit Plan
With a defined benefit plan, the annual retirement benefit is defined. The big thing with these is the annual pension expense and the ending liability
