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CPA - FAR (Becker) > FAR 1 - Standard Setting, Income Statement, and Reporting Requirements > Flashcards

FAR 1 - Standard Setting, Income Statement, and Reporting Requirements Flashcards

1
Q

1.1 Conceptual Frameworks

Name the single source of authoritative nongovernmental U.S. GAAP.

A

The FASB “Accounting Standards Codification” (ASC)

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2
Q

1.1 Conceptual Frameworks

The term “International Financial Reporting Standards” includes what four (4) standards?

A
  1. International Accounting Standards (IAS)
  2. International Financial Reporting Standards (IFRS)
  3. IFRIC Interpretations
  4. SIC Interpretations
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3
Q

1.1 Conceptual Frameworks

Who are the three (3) primary users of general purpose financial reports?

A

Existing and potential:

  1. Investors
  2. Lenders
  3. Other Creditors
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4
Q

1.1 Conceptual Frameworks

Name the pervasive constraint on the information provided in financial reporting.

A

Cost Constraint:

The benefits of reporting financial information must be greater than the costs of obtaining and presenting the information.

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5
Q

1.1 Conceptual Frameworks

Name the two (2) fundamental qualitative characteristics of useful financial information.

A
  1. Relevance = Predictive Value, Confirming Value, Materiality
  2. Faithful Representation = Completeness, Free from Bias [Neutrality], and Freedom from Error.
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6
Q

1.1 Conceptual Frameworks

Name the three (3) elements of relevance.

A
  1. Predictive Value
  2. Confirming Value
  3. Materiality
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7
Q

1.1 Conceptual Frameworks

Name the three (3) elements of faithful representation.

A
  1. Completeness
  2. Free from Bias [Neutrality]
  3. Freedom from Error
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8
Q

1.1 Conceptual Frameworks

Name the four (4) enhancing qualitative characteristics of financial information

A
  1. Comparability
  2. Verifiability
  3. Timeliness
  4. Understandability
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9
Q

1.1 Conceptual Frameworks

According to SFAC #5, what five (5) statements should a full set of financial statements include?

A
  1. Statement of Financial Position (Balance Sheet)
  2. Statement of Earnings (Income Stmt)
  3. Statement of Comprehensive Income
  4. Statement of Cash Flows
  5. Statement of Changes in Owner’s Equity.
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10
Q

1.1 Conceptual Frameworks

What is the difference between realization and recognition?

A

Realization: When sold and converted to cash (or claims to cash – A/R).

Recognition: When recorded in the financial statements.

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11
Q

1.1 Conceptual Frameworks

List the ten (10) elements of financial statements according to SFAC #6.

Memory Aid: CREG and ALE ID

A
  1. Comprehensive Income
  2. Revenues
  3. Expenditures
    4-5. Gains and Losses
  4. Assets
  5. Liabilities
  6. Equity (of Net Assets)
  7. Investments by Owners
  8. Distributions to Owners
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12
Q

1.1 Conceptual Frameworks

List the six (6) elements of financial statements according to the IASB Framework.

A
  1. Assets
  2. Liabilities
  3. Equity
  4. Income (Revenue and Gains)
  5. Expenses (Expenses and Losses)
  6. Capital Maintenance Adjustments
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13
Q

1.1 Conceptual Frameworks

Name the five (5) elements of present value measurement per SFAC #7.

Memory Aid: EVTUO

A
  1. Estimate of future cash flow
  2. Expectations about timing Variations of future cash flows
  3. Time value of money (the risk-free rate of interest)
  4. The price for bearing uncertainty
  5. Other factors ( Example: liquidity issues and market imperfections)
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14
Q

1.1 Conceptual Frameworks

Describe the expected cash flow approach for present value computations.

A

Considers a range of possible cash flows and assigns a (subjective) probability to each cash flow in the range to determine the weighted average, or “expected,” future cash flow.

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15
Q

1.2 Reporting Net Income

What is the presentation order of the major components of an income and retained earnings statement?

Memory Aid: IDEA

A
  1. Income (or loss) from continuing operations
  2. Income (or loss) from discontinued operations
  3. Extraordinary items
  4. Cumulative effect of a change in Accounting principle.
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16
Q

1.2 Discontinued Operations

The gain (loss) from discontinued operations can consist of…

A

An impairment loss, a gain (loss) from actual operations, and a gain (loss) on disposal.

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17
Q

1.2 Discontinued Operations

In what period are the following reported:

  1. An impairment loss?
  2. A gain (loss) from actual operations?
  3. A gain (loss) on disposal?
A

All are reported in the period in which they occur.

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18
Q

1.2 Discontinued Operations

In reporting discontinued operations, how is a “component” of an entity defined under US GAAP and IFRS?

A

US GAAP

  1. An operating segment
  2. A reportable segment
  3. A reporting unit
  4. A subsidiary
  5. An asset group

IFRS

  1. A separate major line of business or geographical area of operations
  2. A subsidiary acquired exclusively with a view to resale.
19
Q

1.2 Discontinued Operations

How do we account for subsequent increases in the fair value of a discontinued component?

A

A gain is recognized for the subsequent increase in fair value minus costs to sell (but not in excess of the preciously recognized cumulative loss) The gain is reported in the period of increase.

20
Q

1.2 Exit or Disposal Activities

What types of costs are associated with exit and disposal activities?

A
  1. Involuntary employee-termination benefits
  2. Costs to terminate a contract that is not a capital lease
  3. Other costs associated with exit or disposal activities
21
Q

1.2 Extraordinary Items

Define extraordinary items.

A
  • Material in nature.
  • Of a character significantly different from the typical or customary business activities (unusual)
  • Not expected to recur in the foreseeable future (infrequent)
  • Not normally considered in evaluating the ordinary operating results of an enterprise.

Key Words: Unusual and Infrequent

Remember: Extraordinary items are recognized under U.S. GAAP but not IFRS.

22
Q

1.2 Extraordinary Items

List some examples of extraordinary items

A
  1. The abandonment of, or damage to, a plant due to an infrequent earthquake or an infrequent flood.
  2. An expropriation of a plant by the government
  3. A prohibition of a product line by a newly enacted law or regulation.
23
Q

1.2 Accounting Changes

Name the three (3) types of accounting changes.

A
  1. Change in accounting principle
  2. Change in accounting estimate
  3. Change in accounting entity
24
Q

1.2 Accounting Changes

How is a change in accounting principle reported?

A
  • Cumulative effect of change is included in the retained earnings statement as an adjustment of beginning retained earnings balance of the earliest year presented.
  • Prior-period FS are restated, if presented.
25
Q

1.2 Accounting Changes

What are the special changes in an accounting principle?

How are special changes in accounting principle reported?

A
  1. A change to LIFO from another method of inventory pricing under U.S. GAAP.
  2. Any other change in which cumulative effect adjustment is considered impractical to calculate.

Special changes are reported prospectively (like a change in estimate)

26
Q

1.2 Accounting Changes

How is a change in an accounting estimate reported?

A
  1. Prospectively
  2. The effect is shown in the current and/or future periods that are affected by the change
  3. Prior Period FS are not restated.
27
Q

1.2 Accounting Changes

Under U.S. GAAP, how is a change in the accounting entity reported?

A

All current and prior period financial statements presented are restated.

28
Q

1.2 Accounting Changes

How are error corrections reports?

A

Reported as prior period adjustment to retained earnings and all comparative financial statements presented are restated.

29
Q

1.3 Comprehensive Income

Define comprehensive income.

A

Change in equity (net assets) that results from revenue, expenses, gains, and losses during a period, as well as any other recognized changes in equity that occur for reasons other than investments by owners and distributions to owners.

30
Q

1.3 Comprehensive Income

Identify five (5) items included in other comprehensive income.

Memory Aid: PUFER

A
  1. Pension adjustments
  2. Unrealized gains and losses on available-for-sale securities
  3. Foreign currency translation adjustments and gains/losses on foreign currency transactions that are designated as economic hedges of a net investment in a foreign entity
  4. Effective portions of cash flow hedges
  5. Revaluation surpluses (IFRS only)
31
Q

1.3 Comprehensive Income

List the two (2) formats acceptable for reporting comprehensive income.

A

Statement of Comprehensive Income (single-statement approach)

Statement of Income followed by separate Statement of Comprehensive Income (two-statement approach.)

32
Q

1.3 Comprehensive Income

List some disclosure requirements for comprehensive income.

A
  1. Tax effects of each component included in current “Other Comprehensive Income”
  2. Changes in the accum. balances of components of “Other Comprehensive Income.
  3. Total accum. other comprehensive income.
  4. Reclassification adjustments between other comprehensive income and net income.
33
Q

1.4 Balance Sheet and Disclosures Overview

Identify the contents of the Summary of Significant Accounting Policies not to the financial statements.

A

Summary of Significant Accounting Policies

Identify and describe:

  1. Measurement bases used in preparing the financial statements
  2. Principles and methods
  3. Criteria
  4. Policies
  5. Pricing
34
Q

1.4 Balance Sheet and Disclosures Overview

Describe the related party disclosures required under U.S. GAAP and IFRS.

A
  1. Material related party transactions
  2. Related party notes/accounts receivable
  3. Control relationships

NOTE: IFRS requires disclosure of key management compensation. U.S. GAAP does not require this disclosure.

35
Q

1.4 Balance Sheet and Disclosures Overview

What are the U.S. GAAP disclosure requirements for risks and uncertainties?

A
  1. Nature of Operations
  2. Use of estimates in preparing the financial statements
  3. Significant estimates
  4. Current vulnerability due to certain concentrations.
36
Q

1.5 Interim Financial Reporting

What are the guidelines for interim reporting?

A
  1. Use the same accounting principles that were used in the most recent annual report.
  2. Allocate expenses to the interim period benefited.
  3. Revenues are recognized in the period in which they are earned and realized or realizable.
  4. A total for comprehensive income in condensed financial statements of interim periods.
37
Q

1.5 Interim Financial Reporting

What income tax rate is used in interim financial reporting?

A

Use best estimate of effective tax rate to be applicable for full fiscal year on quarterly (interim) statements.

38
Q

1.6 Segment Reporting

Name the four required disclosures for segments of an enterprise.

A
  1. Operating segments
  2. Products and Services
  3. Geographic area
  4. Major customers
39
Q

1.6 Segment Reporting

Define operating segment.

A

Distinct revenue-producing components of the enterprise about which separate financial information is produced internally, and whose operating results are regularly reviewed by the enterprise.

Determined using a “management approach.”

40
Q

1.6 Segment Reporting

Name two quantitative thresholds used in identifying reportable operating segments.

A
  1. 10% “Size” test

2. 75% “Reporting Sufficiency” test

41
Q

1.6 Segment Reporting

Describe the 10% Test for identifying reportable segments.

A

1.Revenue
Reported revenue, including both sales to external customers and intersegment sales or transfers, is 10% more of the combined revenue, internal and external, of all operating segments.

  1. Reported profit or loss
    The absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of:
    a. The combined reported profit of all operating segments that did not report a loss, or
    b. The combined reported profit of all operating segments that did report a loss
  2. Assets
    Assets are 10% or more of the combined assets of all operating segments.

NOTE: Must meet only one of the above.

42
Q

1.6 Segment Reporting

What is the 75% test for identifying reportable segments?

A

Combined external (consolidated) revenue of all reportable segments must be at least 75% of the total consolidated revenue of the entity.

The practical limit is 10 segments, but this is not a precise limit.

43
Q

1.6 Segment Reporting

What are the disclosure requirements for reportable operating segments?

A

For each reportable segment, the entity must report:

  1. Identifying factors
  2. Products or services
  3. Profit or loss details
  4. Assets details
  5. Liability details (IFRS only)
  6. Measurement criteria
  7. Reconciliations.
44
Q

1.7 SEC Reporting Requirements

Describe the Form 10-K and the Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?

A

Form 10-K: Filed annually by U.S. registered companies. Includes a summary of financial data, MD&A, and audited FS prepared using GAAP.

form 10-Q: Filed Quarterly by U.S. Registered companies. Included unaudited (reviewed) FS, interim MD&A, and certain disclosures.

CPA - FAR (Becker) (1 decks)

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