FAR 1 - Conceptual Framework & Financial Reporting

Question 1

Who are the primary users of general purpose financial reports?

Answer 1

Existing and potential investors, lenders, and other creditors

Question 2

Fundamental Qualitative Characteristics of useful information

Answer 2

Relevance

• Predictive Value
• Confirmatory Value
• Materiality

Faithful Representation

• Complete
• Neutral
• Free from Error

Question 3

Enhancing Qualitative Characteristics of useful information

Answer 3

Verifiability
Comparability
Understandability
Timeliness

Question 4

Going Concern Assumption

Answer 4

It is presumed that the entity will continue to operate in the foreseeable future

Question 5

Revenue Recognition: 5 Step Approach

Answer 5

1) Identify the contract with the customer
2) Identify the separate performance obligations in the contract
3) Determine the transaction price
4) Allocate the transaction price to the separate performance obligations
5) Recognize revenue when or as the entity satisfies each performance obligation

Question 6

Output Methods

Answer 6

Revenue is recognized based on the value to the customer of the goods or services transferred relative to the remaining goods or services promised.

Ex) units produced, time elapsed, milestones achieved, surveys to date

Question 7

Input Methods

Answer 7

Revenue is recognized based on the entity’s efforts or inputs to the satisfaction of the performance obligation relative to total expected inputs.

Ex) costs incurred relative to total costs, labor-hours expended, time elapsed

Question 8

Incremental costs (of obtaining a contract)

Answer 8

Costs that would not have been incurred if the contract had not been obtained CAPITALIZE

Question 9

What do you do with direct labor, materials, MOH costs to fulfill a contract?

Answer 9

Capitalize if they are expected to be recovered

Question 10

What do you do with SG&A costs to fulfill a contract?

Answer 10

Expense

Question 11

Construction in progress account

Answer 11

• accumulation of construction costs and estimated gross profit earned
• current asset (inventory account)

Question 12

Progress billings

Answer 12

• accumulation of billings on construction

- current liability (contra-inventory account)

Question 13

Finding YTD Gross profit/loss using Percentage-of-Completion Method

Answer 13

1) Compute gross profit of “completed” contracted
Contract/Sales Price - Estimated total cost = Gross Profit

2) Compute percentage of completion
Cost incurred / Total estimated cost of contract

3) Compute gross profit earned (profit to date):
Step 1 x Step 2 = PTD

4) Compute gross profit earned for current year:
End - Beginning = Current year gross profit

**Estimated losses are recognized immediately and all prior profits are reversed

Question 14

Completed Contract: Gross Profit

Answer 14

No gross profit is ever recognized, losses should recognized in full in the year they are discovered

Question 15

Changes in Accounting Estimate

Answer 15

PROSPECTIVE application - implement in the current period and continue in future periods. No effect on previously reported retained earnings. Disclose effects in the notes to the FS (besides ordinary estimates such as uncollectible accounts and inventory adjustments)

Question 16

Changes in Accounting Principle

Answer 16

RETROSPECTIVE application - adjust beginning retained earnings in the earliest period presented

Question 17

Exception to Accounting Principle Rule

Answer 17

1) Changes TO LIFO
2) Change in Depreciation Method (both principle and estimate)
* handle these prospectively

Question 18

Error Correction

Answer 18

Prior period adjustment. Correct the information if the year is presented. Adjust beginning Retained earnings of earliest year presented (net of tax), could be current year.

Question 19

Other Comprehensive Income

Answer 19

PUFIE
Pension adjustments
Unrealized Gains and Losses (AFS)
Foreign Currency Items
Instrument-Specific Credit Risk
Effective Portion of Cash Flow Hedges