FAR 2-5 - Sheet1

Question 1

Q500. What is a stock dividend?

Answer 1

A500. A distribution of the issuing company’s shares to its shareholders in proportion to each investor’s existing holdings.

Question 2

Q501. Why is there no liability recorded for stock dividends?

Answer 2

A501. Because stock dividends do not involve a future transfer of assets or a future provision of services.

Question 3

Q502. In essence, what happens with each investor’s holdings as a result of a stock dividend?

Answer 3

A502. Each investor simply holds more shares, but each share is worth proportionately less than before the dividend. Each investor maintains the previous ownership percentage.

Question 4

Q503. What does it mean when you receive a 2 for 1 stock distribution?

Answer 4

A503. For every 1 share you have, you’ll receive 1 more. You double the shares, but each share is worth 1/2

Question 5

Q504. What are dividends in arrears?

Answer 5

A504. Unpaid dividends for a particular year on cumulative preferred stock

Question 6

Q505. What is cumulative preferred stock?

Answer 6

A505. Dividends are not required to be paid but are said to accumulate if unpaid. The cumulative feature of preferred stock means in the event of a dividend declaration, preferred shareholders are entitled to be paid the dividends in arrears before any distribution related to the current period occurs.

Question 7

Q506. When can a liability be recognized for dividends in arrears?

Answer 7

A506. Only when a dividend is declared

Question 8

Q507. Where are dividends in arrears recorded?

Answer 8

A507. In the footnotes

Question 9

Q508. Accrued liabilities are typically related to adjusting entries. To or F

Answer 9

A508. True

Question 10

Q509. What are accrued liabilities?

Answer 10

A509. They are recorded because of the passage of time or because resource changes have occurred without cash being paid.

Question 11

Q510. Give two examples of accrued liabilities.

Answer 11

A510. Wages Payable between the last payday of a fiscal period and the end of the period, and Interest Payable between the last interest payment date of a fiscal period and the end of the period.

Question 12

Q511. The employer serves as a collection point for payroll taxes for the employer and employee and submit them at regular intervals. T or F

Answer 12

A511. True

Question 13

Q512. As far as payearoll taxes, what taxes are to be paid by the employee?

Answer 13

A512. Federal Income Tax State Income Tax FICA (social security, assessed up to a maximum wage limit.

Question 14

Q513. What are the taxes that are to be paid by the employer?

Answer 14

A513. FUTA Federal Unemployment SUTA State Unemployment FICA, equivalent to employee amount Wage limits apply to each of the taxes.

Question 15

Q514. What is the journal entry for the employee’s payearoll tax liabilities?

Answer 15

A514. Debit: Sal/Wage Expense Credit: FITP Federal IncTx Pay Credit: SITP State IncTxPay Credit: Fica TP Credit: Cash

Question 16

Q515. What is the journal entry for the employer’s payroll tax liabilities?

Answer 16

A515. Debit: Payroll Tax Expense Credit: FUTP Federal UnTx Pay Credit: SUTP State UnTxPay Credit: Fica TP

Question 17

Q516. What is property tax?

Answer 17

A516. Tax levied by the local government to support schools and other activities.

Question 18

Q517. When is property recorded in the accounts?

Answer 18

A517. When the government levis the tax and makes it payable.

Question 19

Q518. If property tax is payable at the beginning of the fiscal period, describe the accounting treatment.

Answer 19

A518. Prepaid Tax is recorded and paid. Then, an expense is recorded each month to recognize the monthly tax being earned.

Question 20

Q519. If property tax is payable at the end of the fiscal period, describe the accounting treatment.

Answer 20

A519. Monthly entries would recognize the expense and payable, because throughout the year, it’s not yet due. The expense is recorded as it is earned. At the end of the period, the property tax payable would be closed and the payable would be paid.

Question 21

Q520. What are the journal entries to record property tax when it’s due at the beginning of the year?

Answer 21

A520. At the beginning of the period: Debit: Prepaid Property Tax Credit: Cash Monthly: Debit: Prop Tax Expense Credit: Prepaid Prop Tax

Question 22

Q521. What are the journal entries to record property tax when it’s due at the end of the year?

Answer 22

A521. Monthly: Debit: Prop Tax Expense Credit: Prop Tax Pay At the end of the period: Debit: Prop Tax Pay Credit: Cash

Question 23

Q522. What are Compensated Absence Liabilities?

Answer 23

A522. The accrual of earned vacation and holiday pay.

Question 24

Q523. . SFAS #43 requires that vacation and holiday pay be accrued during the period employees earn these benefits, BUT ONLY ACCRUE if what four criteria are met?

Answer 24

A523. 1. OBLIGATION is attributable to services rendered as of the balance sheet date 2. The RIGHTS vest (benefits are no longer contingent on continued employment) or accumulate (carry over to future periods) 3. PAYMENT of the obligation is probable 4. AMOUNT of the obligation is estimable

Question 25

Q524. What does it mean if vacation/holiday rights vest?

Answer 25

A524. Benefits are no longer contingent on continued employment. Employees can leave the firm and be paid the benefits that vested.

Question 26

Q525. What does it mean if vacation/holiday rights accumulate?

Answer 26

A525. Benefits carry over to future periods

Question 27

Q526. What do limits on accumulation of vacation/holiday rights do?

Answer 27

A526. Places a cap on the amount of liability accrued. In other words, you may only be able to accumulate so much.

Question 28

Q527. What wage rates are the accrual of vacation/holiday pay based on?

Answer 28

A527. Based on current wage rates

Question 29

Q528. Is an attempt made to estimate wage increases that might be in effect when vacation or holiday is taken?

Answer 29

A528. No. Accrual is recorded at the current wage rate.

Question 30

Q529. What is the adjusting entry at the end of the period for the accrual of earned and unpaid holiday/vacation pay?

Answer 30

A529. Debit: Salary Expense Credit: Liabilities for Com Ab’s

Question 31

Q530. What should be done if there’s a pay rate increase?

Answer 31

A530. Only accrue it to Salary Expense if the pay is being paid right then.

Question 32

Q531. Should accumulated sick pay benefits be accrued?

Answer 32

A531. No. But they can be.

Question 33

Q532. What is the rule if unused sick pay benefits are to be paid to employees, for example, if they leave the firm?

Answer 33

A532. Accrual is required.

Question 34

Q533. Deferred or Unearned Revenues are usually related to what type of journal entries?

Answer 34

A533. Adjusting entries

Question 35

Q534. What accounting classification is unearned revenue?

Answer 35

A534. A Liability

Question 36

Q535. What is unearned revenue?

Answer 36

A535. Revenue received but have not earned. i.e. Cash received but product or service not provided.

Question 37

Q536. What is the journal entry for receiving cash in advance of providing the product or service?

Answer 37

A536. Debit: Cash Credit: Unearned Revenue

Question 38

Q537. What is the journal entry for providing the product or service when cash has already been received?

Answer 38

A537. Debit: Unearned Revenue Credit: Revenue

Question 39

Q538. What are sales taxes?

Answer 39

A538. When firms collect sales taxes from their customers and periodically submit them to the government

Question 40

Q539. Between collection and submission of the tax, the firm has a liability to the government. T or F

Answer 40

A539. True

Question 41

Q540. When calculating sales taxes payable, the amount payable may be included in the Total amount collect from the customer. Regarding sales taxes, what is included in the Total amount collected from the customer?

Answer 41

A540. Sales and Sales Taxes

Question 42

Q541. What is the journal entry to record cash sales made to customers, including sales taxes?

Answer 42

A541. Debit: Cash Credit: Sales Credit: Sales Taxes Pay

Question 43

Q542. How would sales taxes payable be calculated from total sales?

Answer 43

A542. Total sales / 1 + Sales Tax%

Question 44

Q543. What is the title for FAS 146?

Answer 44

A543. Accounting for Costs Associated with Exit or Disposal Activities

Question 45

Q544. What does FAS 146, Accounting for Costs Associated with Exit or Disposal Activities, require?

Answer 45

A544. Requires firms to recognize a liability (and expense) for exit or disposal activities at fair value in the period in which the liability is incurred.

Question 46

Q545. What is an exit activity?

Answer 46

A545. Includes a RESTRUCTURING that is planned and controlled by management and materially changes the scope or conduct of the business

Question 47

Q546. What disposal activities does FAS 146, Accounting for Costs Associated with Exit or Disposal Activities not apply to?

Answer 47

A546. An entity acquired in a business combination, and disposal activities not covered by FAS 144 on asset impairment. It also does not apply to costs associated with asset retirement obligations (FAS 143).

Question 48

Q547. Give examples of costs covered by FAS 146, Accounting for Costs Associated with Exit or Disposal Activities.

Answer 48

A547. 1. One-time termination benefits provided to employees terminated under a benefit arrangement that is not part of an ongoing employee benefit agreement. FAS 146 does not alter the accounting for termination benefits under established pension and other employee benefit pronouncements: FAS 87, 88,106, 112. 2. Costs to terminate a contract other than a capital lease 3. Costs to consolidate facilities or relocate employees

Question 49

Q548. Regarding initial recognition and measurement of exit and disposal activities, when is the liability for the cost recognized and at what value?

Answer 49

A548. When the liability is incurred and at fair value

Question 50

Q549. What is fair value?

Answer 50

A549. The amount at which the liability could be settled in a current transaction between willing parties

Question 51

Q550. When should the liability for exit and disposal costs be recognized if fair value cannot be reasonably estimated at the time the liability is incurred?

Answer 51

A550. When the fair value can be reasonably estimated

Question 52

Q551. Regarding initial recognition and measurement of exit and disposal activities, when is a liability incurred?

Answer 52

A551. When the Concepts Statement 6 definition of liability is met: When it is probable that the firm has an obligation to transfer assets or provide services to other entities in the future as a result of past transactions The term probable used in its general meaning

Question 53

Q552. Is creation of an exit or disposal plan sufficient for liability recognition?

Answer 53

A552. No

Question 54

Q553. What is the name of the expense frequently recorded along with the liability to record exit or disposal activities?

Answer 54

A553. Restructuring Expense

Question 55

Q554. When are the costs to terminate a contract recognized?

Answer 55

A554. When the contract is terminated, not when a plan is agreed upon

Question 56

Q555. In regards to exit and disposal activities, the fair value initially recorded for a noncurrent liability is also the PV. T or F

Answer 56

A555. True

Question 57

Q556. In regards to exit and disposal activities, how is the change to the liability balance due to the passage of time recorded?

Answer 57

A556. Is recorded as an increase to the liability and to an expense such as “accretion expense.”

Question 58

Q557. In regards to exit and disposal activities, how is the increase to the liability calculated?

Answer 58

A557. It’s the product of the credit-adjusted risk-free rate for the firm, and the beginning balance in the liability

Question 59

Q558. What causes an adjustment to the liability balance and the expense recorded initially for exit and disposal activities?

Answer 59

A558. Revisions in the timing or amount of future cash flows used in computing the initial liability

Question 60

Q559. What two factors do liabilities dependent on operating results sometimes need?

Answer 60

A559. Taxes and Bonus

Question 61

Q560. What is a bonus?

Answer 61

A560. An additional amount of compensation in excess of a base salary

Question 62

Q561. Frequently, liabilities related to bonus compensation are dependent on what?

Answer 62

A561. The operating results for the accounting period

Question 63

Q562. Bonuses may be based on what four factors?

Answer 63

A562. Income before or after the bonus Income before or after income taxes

Question 64

Q563. Does entering into a contract (to do something in the future) create a liability for the accounts?

Answer 64

A563. No. The event must meet all three definitions of a liability which includes “being the result of a past transaction or event. A contract to do something in the future is not a past event.

Question 65

Q564. What are the three elements from the conceptual framework that must be met by a liability for it to be included in the accounts?

Answer 65

A564. 1. Probable future sacrifice of economic benefits 2. Obligation to transfer assets or provide services in the future 3. Be the result of a past transaction or event

Question 66

Q565. What affects how a liability is measured?

Answer 66

A565. Its classification into current or noncurrent

Question 67

Q566. Why do many firms have a preference for classifying liabilities as noncurrent rather than current?

Answer 67

A566. To improve their reported liquidity position and reduce the perceived immediate riskiness of the firm.

Question 68

Q567. What SFAS was adopted to curb reporting abuses in the area of classiftying current liabilities as noncurrent?

Answer 68

A567. SFAS #6.

Question 69

Q568. Now there are definite criteria which must be met before a liability due within one year of the balance sheet date can be reclassified as noncurrent. T or F

Answer 69

A568. True

Question 70

Q569. What is the definition of a current liability?

Answer 70

A569. Due in the coming year or the operating cycle of the business, whichever is longer. and An obligation to be met by the transfer of a current asset or the creation of another current liability.

Question 71

Q570. Part of the definition of a current liability involves refinancing a current liability with another current liability. What does this actually mean?

Answer 71

A570. Paying off a currently liability by creating another current liability.

Question 72

Q571. What does refinancing mean?

Answer 72

A571. To get new financing (money) with new terms.

Question 73

Q572. Per SFAS 6, reclassification of a liability to long-term status is possible if what two conditions are met?

Answer 73

A572. 1. Intent 2. Ability

Question 74

Q573. Per SFAS 6, reclassification of a liability to long-term, what is meant by Intent?

Answer 74

A573. The firm must PROVIDE PROOF that it INTENDS to refinance the obligation as of the balance sheet date.

Question 75

Q574. Give examples of proof of intent to refinance a short-term obligation to long-term.

Answer 75

A574. Board of directors’ meeting minutes Written correspondence with the financial institution.

Question 76

Q575. Per SFAS 6, reclassification of a liability to long-term, what is meant by Ability?

Answer 76

A575. 1. The firm must also be ABLE to refinance the obligation and demonstrate that ability in one of 3 ways before the issuance of the financial statements. 2. The details of the refinancing arrangement must be disclosed in the footnotes.

Question 77

Q576. If a short-term obligation is paid off in cash before the issuance of the financial statements but after the balance sheet date, how is the it classified in the current year balance sheet?

Answer 77

A576. It remains a current liability because it was extinguished with a current asset.

Question 78

Q577. If a refinancing agreement is cancelable, can the current liability be reclassified to noncurrent liability?

Answer 78

A577. No. Because there’s no guarantee that current assets will not be used to pay off the liability.

Question 79

Q578. What is a revolving credit agreement?

Answer 79

A578. When one current liability is continually replaced with another current liability.

Question 80

Q579. Can a revolving credit agreement be reclassified to noncurrent?

Answer 80

A579. No

Question 81

Q580. The amount of short-term debt that can be reclassified as noncurrent is limited to what?

Answer 81

A580. The amount stated in the agreement or the amount put of for collateral by the debtor

Question 82

Q581. What does SFAS 47 discuss?

Answer 82

A581. DISCLOSURE of purchase obligations, redeemable stock, and other long-term obligations.

Question 83

Q582. What four items should be disclosed for a Purchase Obligation?

Answer 83

A582. NFAI 1. The nature and terms of the purchase obligations 2. The fixed and variable components of the purchase obligations 3. Actual purchases of merchandise for each year. 4. If the agreements are noncancelable, the amount as of the balance sheet date and for the next five years must be shown.

Question 84

Q583. What are the two discloses for Redeemable Stock?

Answer 84

A583. FP and FD 1. The fixed or determinable PRICE of the redeemable stock 2. The fixed or determinable DATE for the stock redemptions.

Question 85

Q584. In what two ways can the redeemable stock be disclosed?

Answer 85

A584. Can be disclosed for EACH issuance of redeemable stock or in a COMBINED disclosure for all redeemable stock.

Question 86

Q585. What are the three disclosures for Other Long-term Liabilities?

Answer 86

A585. TSA 1. The TOTAL maturity value of each long-term obligation should be disclosed. 2. The SINKING fund requirements related to each long- term obligation 3. The AGGREGATE amount of the maturities and sinking fund requirements for each of the five years following the balance sheet

Question 87

Q586. What are contingent liabilities?

Answer 87

A586. Liabilities whose existence depends on a future event.

Question 88

Q587. What is the accounting for contingent liabilities dependent on?

Answer 88

A587. (1) The PROBABILITY of the occurrence of a future event and (2) Whether the firm can estimate the amount.

Question 89

Q588. What is a Contingency?

Answer 89

A588. An EXISTING condition (at the balance sheet date) involving UNCERTAINTY as to a possible GAIN or LOSS that will be resolved when a FUTURE event occurs or fails to occur.

Question 90

Q589. What will the resolution of a contingency confirm?

Answer 90

A589. An increase in assets (or reduction in a liability), OR The incurrence of a liability or an asset impairment.

Question 91

Q590. Does a contingency have to be a result of a past transaction or event like other liabilities?

Answer 91

A590. Yes. It’s just that a contingent liability also has a future event that plays a role in recognizing the liability.

Question 92

Q591. In assessing the probability of occurrence of a future event of a contingent liability, what must be employed to classify the probability?

Answer 92

A591. Professional Judgment

Question 93

Q592. What are the three categories of classifying the probability of a contingent liability?

Answer 93

A592. Probable Reasonably Possible Remote

Question 94

Q593. Describe the Probable classification for classifying the probability of a contingent liability.

Answer 94

A593. Based on professional, very high or near certainty.

Question 95

Q594. Describe the Reasonably Possible classification for classifying the probability of a contingent liability.

Answer 95

A594. Based on professional judgment, the probability of occurrence is neither very high nor remote. (middle)

Question 96

Q595. Describe the Remote classification for classifying the probability of a contingent liability.

Answer 96

A595. Based on professional judgment, the probability of occurrence is very low or remote.

Question 97

Q596. The accounting for contingencies is also dependent on reasonable estimates. Describe how to achieve a reasonable estimate.

Answer 97

A596. Based on professional judgment and experience, a determination is made about the POSSIBILITY of ESTIMATING the amount of the contingency. Either the amount of resulting gain or loss is reasonably estimable, or it is not

Question 98

Q597. What are the two types of contingencies?

Answer 98

A597. Gain Contingency Loss Contingency

Question 99

Q598. Name the four types of probabilities for loss contingencies?

Answer 99

A598. 1. The loss contingency is probable and can be reasonably estimated at the balance sheet date. 2. The loss contingency is probable and cannot be reasonably estimated. 3. The loss contingency is reasonably possible. 4. The loss contingency is remote.

Question 100

Q599. What does SFAS 5 say about a contingent loss that is both probable and estimable?

Answer 100

A599. An estimated loss and estimated liability will be recognized

Question 101

Q600. What are the guiding theoretical considerations for contingent losses that are both probable and estimable?

Answer 101

A600. Conservatism and Definition of a liability

Question 102

Q601. For contingent liability purposes, what is a loss?

Answer 102

A601. An asset decrease or liability increase

Question 103

Q602. What is meant by a loss contingency that is probable and cannot be reasonably estimated?

Answer 103

A602. SHOULD be disclosed in the footnotes

Question 104

Q603. What is meant by a loss contingency that is reasonably possible?

Answer 104

A603. Whether the loss can be reasonably estimated or not, the loss contingency IS disclosed in the footnotes

Question 105

Q604. What is meant by a loss contingency that is remote?

Answer 105

A604. Whether the loss can be reasonably estimated or not, the loss contingency CAN be disclosed in the footnotes. Footnote disclosure is permitted but not required.

Question 106

Q605. What are the three types of Gain contingencies?

Answer 106

A605. 1. Probable 2. Reasonably Possible 3. Remote

Question 107

Q606. What should be done if a gain contingency is probable?

Answer 107

A606. In this situation, whether the gain can be reasonably estimated or not, the gain contingency IS disclosed in the footnotes

Question 108

Q607. What should be done if a gain contingency is reasonably possible?

Answer 108

A607. In this situation, whether the gain can be reasonably estimated or not, the gain contingency IS disclosed in the footnotes

Question 109

Q608. What should be done if a gain contingency is remote?

Answer 109

A608. In this situation, whether the gain can be reasonably estimated or not, footnote disclosure of the gain contingency is not recommended.

Question 110

Q609. Firms may be able to estimate a possible range of amounts for the gain or loss, but be unable to assign any amount in the range a higher probability of occurring than any other amount. T or F

Answer 110

A609. True

Question 111

Q610. What is a loss in relation to contingent liabilities?

Answer 111

A610. An asset decrease or liability increase

Question 112

Q611. What is a gain in relation to contingent liabilities?

Answer 112

A611. An asset increase or liability decrease

Question 113

Q612. Conservatism plays an important role in recognizing contingent liabilities, but when only a range of possible values is known for a probable loss contingency, what is the exception made in recognizing in the accounts?

Answer 113

A612. When there’s a range of values and no probability is given to one value over the other, the LOWEST rather than the highest amount is used for reporting purposes. – However, the footnotes should disclose the entire range. If a range of values were given but one value in the range has a higher probability assigned to it than any other, the value with the higher probability is used for reporting.

Question 114

Q613. What type of loss contingency is a warranty liability?

Answer 114

A613. Probable and Estimable

Question 115

Q614. For warranty liabilities, the firm usually estimates the number of claims to be submitted by customers. What is the journal entry to record the estimate?

Answer 115

A614. Debit: Warranty Expenses Credit: Warranty Liabilities

Question 116

Q615. For warranty liabilities, when should an estimate of claims be recorded in the accounts?

Answer 116

A615. In the year of sales

Question 117

Q616. If a firm significantly overstates the actual claims cost from the previous year, what should be done in the current year?

Answer 117

A616. In an adjusting entry, a smaller percent of sales is used to estimate the current year’s sales. The opposite is true as well.

Question 118

Q617. Is there a retroactive adjustment for estimating warranty claims?

Answer 118

A617. No. The estimate is changed for the current and future periods to reflect the actual level of claims.

Question 119

Q618. Regarding a range of estimable loss contingencies with no value having a higher probability over the other, the lowest value should be used. Is this the least or most conservative option?

Answer 119

A618. Least

Question 120

Q619. What is the journal entry for a Contingent Litigation?

Answer 120

A619. Debit: Estimated Loss from Pending Lawsuit Credit: Estimated Loss from Pending Lawsuit

Question 121

Q620. For contingent premium liabilities, how is the estimate for premium calculated?

Answer 121

A620. Sales/Contingency Factor x Probability % x Cost i.e Contingency Factor would be: Must return 20 coupons to receive a free cup

Question 122

Q621. What two journal entries must be done in Year 1 of a premium offer?

Answer 122

A621. Record the Purchase of the premium item to be offered Record the Estimate of the Premium to be redeemed

Question 123

Q622. What is the journal entry to record a purchase of an item for premiums to be offered?

Answer 123

A622. Debit: Premium Inv Credit: Cash

Question 124

Q623. What is the journal entry to record the estimation of premiums to be redeemed?

Answer 124

A623. Debit: Estimated Premium Expenses Credit: Estimated Premium Liabilities

Question 125

Q624. What is the journal entry to record the actual redemption of a premium ( i.e. premium coupons)?

Answer 125

A624. Debit: Estimated Premium Liabilities Credit: Premium Inv

Question 126

Q625. Which entities determined GAAP? Since 1934 1939 until 1959 1959 until 1973 1973 until 2009

Answer 126

A625. 1934 -SEC (Securities and Exchange Commission) legal authority to establish US GAAP. 1959 until 1973 - APB (Accounting Principles Board) 1973 until 2009 - (FASB) Financial Accounting Standards Board 1939 until 1959 - CAP (Committee on Accounting Procedures of AICPA)

Question 127

Q626. Effective July 1, 2009

Answer 127

A626. FASB Accounting Standards Codification became the single source of authoritative nongovernment US GAAP….Accounting and financial reporting practices not included in the Codification are not GAAP.

Question 128

Q627. Authoritative Literature Included in the Codification (7) various standard setters

Answer 128

A627. FEDPRIA.. F- FASB (Financial Accounting Standards Board) E - EITF (Emerging Issues Task Force) D - Derivative Implementation Group Issues P - Accounting Principles Board Opinion R - Accounting Research Bulletins I - Accounting Interpretations A - AICPA (American Institute of Certified Public Accountants

Question 129

Q628. FASB (6) codification literature

Answer 129

A628. FASB (6) codification literature 1. Statement of Financial Accounting Standards 2. Interpretations 3. Technical Bulletins 4. Staff Positions 5. Staff Implementation Guides 6. Statement No. 138 Examples

Question 130

Q629. AICPA (4) codification literature

Answer 130

A629. AICPA (4) codification literature 1. Statements of Position 2. Auditing and Accounting Guides (Incremental Accounting guidance only) 3. Practice Bulletins 4. Technical Inquiry Service (for software revenue recognition)

Question 131

Q630. SEC Standards included in the codification (6)

Answer 131

A630. SEC Standards included in the codification (6) 1. Regulation S-X 2. (FRR) - Financial Reporting Releases 3. (ASR) Accounting Series Releases 4. (IR) Interpretative Releases 5. (SAB) Staff Accounting Bulletin 6, EITF Topic D and SEC Staff Observer comments

Question 132

Q631. FASB updates the Accounting Standards Codification for new US GAAP issued and for amendments to the SEC content

Answer 132

A631. FASB amendments are issued for public comment in the form of Exposure Drafts.

Question 133

Q632. A majority vote of 3 board members is required to approve an Exposure Draft for issuance.

Answer 133

A632. All new GAAP and SEC amendments are fully integrated into the existing structure of the Codification.

Question 134

Q633. International Accounting Standards Committee (IASC) - 1973 until 2001 International Accounting Standards Board (IASB) - 2001 Intl Financial Reporting Interpretations Committee(IFRIC)

Answer 134

A633. The purpose of the IASB is to develop a single set of high quality global accounting standards. The IFRIC is appointed by the trustees of IASC foundation to assist the IASB in establishing and improving standards of financial accounting and reporting. The IASB issues Intl Financial Reporting Standards (IFRS) and related documents.

Question 135

Q634. SFAC No. 1 - Objectives of Financial Reporting

Answer 135

A634. Focus on information needs of external users. Purpose of Financial reporting are for external users to disclose entity’s performance.

Question 136

Q635. SFAC No. 2 - Qualitative Characteristics of Accounting information. Hierarchy of Qualitative:

Answer 136

A635. BUDS B- Benefits greater than cost to obtain and present the information U - Understandability -reasonable amount of knowledge and amount of effort to study the information presented. D - Decision Usefulness - Primary Relevance and Reliability (R&R) S - Secondary Characteristics - Comparability and Consistency (C&C)

Question 137

Q636. Primary R&R - Relevance (3)

Answer 137

A636. Relevance (Passing Feels Terrific) - (PFT) 1. Predictive Value - evaluate events 2. Feedback Value - confirm prior 3. Timeliness - availability

Question 138

Q637. Primary R&R - Reliability (3)

Answer 138

A637. Reliability -Nobody Relies on Financials unless Verified. (NRFV) 1. Neutrality - free from bias 2 Representational Faithfulness - Not misleading 3. Verifiability - can be verified

Question 139

Q638. Secondary Characteristics (C&C)

Answer 139

A638. Secondary Characteristics (C&C) 1. Comparability - identify similarities/ differences in two sets of information (Ex. Apple vs. Microsoft) 2. Consistency - Ability to Compare one period to another. (Ex. Prior year vs Current year)

Question 140

Q639. SFAC No. 7 Using Cash Flow Information and Present Value in Accounting Measurements. 5 elements of PV

Answer 140

A639. 5 elements of PV 1. Estimate of future cash flow 2. Expectations about timng variations of future cash flows 3. Time Value of money 4. The price for bearing uncertainty. 5. Other factors (liquidity issues/credit risk and market imperfections)

Question 141

Q640. Present Value Computations (2)

Answer 141

A640. Present Value Computations (2) 1. Traditional Approach - PV bonds, scheduled known payments 2. Expected Cash Flow Approach ( PV warranties, uncertain future payments

Question 142

Q641. Income statement

Answer 142

A641. Performance for a period of time; useful in determining profitability, value of investment purposes and credit worthiness.

Question 143

Q642. Presentation order of major components of the income and retained earnings statement (IDEA)

Answer 143

A642. IDEA I - Income (or Loss) from Continuing Operations - before tax (include operating. non operating activities and income taxes) D - Discontinued Operations - net of tax E - Extraordinary Items - unusual in nature and infrequent in occurrence. A - Accounting Principle-Cumulative effect of change..reported net of tax on Retained Earnings

Question 144

Q643. I- Income from continuing operations - multiple step income statement

Answer 144

A643. I - Income from continuing operations (gross & net of tax) the multiple step income statement reports operating (core business) revenues and expenses separately from non operating (not core) revenues and expenses and other gains and losses. Ex. Net sales>cost of goods sold>gross margin>selling expenses>general & admin expenses>depreciation expense>income (loss) from operations then… Other revenues and gains> interest income>gain on sale of fixed asset>other income>Other expenses & losses>interest expense>loss on sale of fixed asset>income before unusual items and income tax>unusual or infrequent items>loss on sale of available for sale securities>Income before income tax>provision for income taxes>current tax>deferred> Net Income (after tax)

Question 145

Q644. D - Discontinued Operations - exit of disposal activities (net of tax) assets are no longer depreciated or amortized

Answer 145

A644. D - Discontinued Operations -normal (loss) loss from discontinued operations can consist of an impairment loss, a gain/loss from actual operations, and gain/loss on disposal included in the period in which they occurred. displayed in the income statement after income from Continuing operation.

Question 146

Q645. Held for sale (4 criteria)

Answer 146

A645. A component of a business or disposal group is classified as Held for Sale in the period in which the 4 the criteria: 1. Plan 2. Available 3. Advertised 4. Unlike to Review

Question 147

Q646. Discontinued Operation calculation Facts: Losing $200k per month 4/30 Yr1 decision to dispose 4/30 Yr1 carrying value $4 mil 4/30 Yr1 fair value $2.2 mil 6/30 Yr2 sold for 2 mil Yr2 continued losing $200k per month Tax rate 40% What year would held for sale and impairment loss be recognized? What is the impairment loss? Loss from continuing operations Yr1 and Yr2? Total loss from discontinued operations (after tax) for Yr 1 and Yr 2?

Answer 147

A646. Held for Sale Yr1 and Impairment Yr1. Impairment loss: $1,800,000 Loss from continuing operation: Yr1 $2,400,000 = 200,000 x 12 and Yr2 $1,200,000 = $200,000 x 6 Loss from discontinued operations : Yr 1 $2,520,000 = (1,800,000 +2,400,000) x (1-40%) and Yr 2 $840,000 = (1,200,000 + $200,000) x (1-40%)

Question 148

Q647. Extraordinary Items - net of tax (IFRS - prohibits)

Answer 148

A647. Extraordinary items are transactions that are material in nature, significantly different from the typical business activities, not expected to recur in the foreseeable future. (usual and infrequent) disclosed in the income statement after discontinued operations.

Question 149

Q648. Nonextraordinary items - gross, before tax

Answer 149

A648. Separate component of continuing operations (5) 1. gain/loss from sale or abandonment of property used in the business 2. Large writedowns or writeoffs 3. Gain/Loss from foreign currency transaction or translation 4. Losses from major strike by employees 5. Long term debt extinguishments (mgmt strategy)

Question 150

Q649. Accounting Changes and Error Corrections (3) - Retained Earnings Statement (cumulative effect of change in accounting)

Answer 150

A649. Accounting changes and error corrections. Changes in accounting: 1. Estimate - (prospective) effects current and future, not acct principle such as LIFO to FIFO depreciation. 2. Principle - (retro) - must be a justified change from one accounting principle to another acceptable principles. such as completed contract method vs. percentage of completion 3. Change in Accounting Entity - restate - when entity being reported on has changed composition. such as consolidated statement to single statement. 4. Error Corrections - restate - prior period adjustment. adjust beginning retained

Question 151

Q650. Statement of Retained Earnings -

Answer 151

A650. Beginning balance>Prior period adjustment> Add: income tax benefit> cumulative effect of accounting change> Less: income tax effect>Beginning balance> Add net income> Less Dividends>Cash dividend declared on common stock> Ending Balance.

Question 152

Q651. Comprehensive Income - non owner transactions

Answer 152

A651. Comprehensive Income is the change in equity (net assets) of a business enterprise during a period from nonowner transactions. Net Income: Per Income Statement (IDE) + Other comprehensive income (PUFER)

Question 153

Q652. PUFER- direct to equity

Answer 153

A652. PUFER P- Pension Adjustments U- Unrealized Gains/Losses F- Foreign Currency Items E- Effective Portion of Cash Flow Hedges (IFRS only) R- Revaluation Surplus

Question 154

Q653. Reclassification Adjustments -Avoids double counting

Answer 154

A653. Move other comprehensive income items from accumulated other comprehensive income to the income statement. They may be displayed on the face of the financials or the notes.

Question 155

Q654. Financial Statement Reporting my be presented in 3 approachs

Answer 155

A654. 1. Single Statement Approach - start with revenue>expenses>income before income taxes>income tax (%)> net income>Other comprehensive income, net of income tax>Pension net loss>Unrealized holding gains> foreign currency items>Comprehensive income. 2. Two statement approach- start with Net Income + PUF 3. Component within statement of Owner’s Equity- starts with beginning and ending balances. it also includes retained earnings information.

Question 156

Q655. Notes to Financial Stmt

Answer 156

A655. Both IFRS and GAAP require a description of all significant policies be included as an integral part of the financial statements.

Question 157

Q656. Summary of Significant Accounting Policies Identify and describe: measurement bases used in principles/ methods, criteria, policies, pricing.

Answer 157

A656. Remaining notes to the Financial Statements Information relevant to decision makers. Such as pension plan description and Contractual obligations.

Question 158

Q657. Interim Financial reporting - Quarterly Financials - Not required under US GAAP or IFRS. - Matching of revenue and expenses by quarter and not by year. -timeliness over reliability

Answer 158

A657. Segment Reporting - provide information on the business activities and the economic environment of a country. Publically traded - big conglomerate with lots of products sold in differ geo areas. “better understand the whole in parts.

Question 159

Q658. Disclosures of all Public Enterprises (Publically Traded) Segmented by Operating segments, Products and Service, Geographic areas, Major customers

Answer 159

A658. Intercompany Transactions not eliminated for reporting. transactions between the segments such as consolidations between parent companies and subsidiary

Question 160

Q659. Qualitative Threshold for Reportable Segments. 10% test for revenue, profit & loss and assets. 75% reporting sufficiency test for consolidated revenue.

Answer 160

A659. Development Stage enterprises (GAAP) - an operation has not yet commenced or principal operation have generated an insignificant amount of revenue (or loss)

Question 161

Q660. Fair Value measurement and disclosures

Answer 161

A660. Fair value is the price to sell an asset of transfer a liability in a orderly transaction between market participants at the measurement date.

Question 162

Q661. Most areas require fair value disclosures, separate rules apply to..

Answer 162

A661. Inventory pricing which is lower cost of market, Present value lease classification and measurement.

Question 163

Q662. Orderly fair value transactions can not be a forced transaction such as a liquidation. -Fair value Market participants are independent buyers and sellers - and not related parties. Use Most Advantageous Market if no principle market. Highest and Best Use - Use or Exchange

Answer 163

A662. Fair Value Valuation Techniques (3) 1. Market Approach - identical and comparable 2. Income Approach - cash flows or earnings 3. Cost Approach - replacement cost

Question 164

Q663. Fair Value Hierarchy of Inputs (3) Level 1 Most Reliable; Identical and Active Markets Level 2 Similar/Active > Identical/ Not Active Market Level 3 Not quite as reliable

Answer 164

A663. Exceptions to Fair Value measurement (3) 1. It is not practical to measure 2. Can not be reasonably determined 3. Can not be measured with sufficient reliability.

Question 165

Q664. Revenue should be recognized when…

Answer 165

A664. Revenue should be recognized when it is realized and when it is earned

Question 166

Q665. 4 criteria should be met for each element of the contract…

Answer 166

A665. 1. Evidence of arrangement exists (signed contract) 2. Services have been rendered (risk & reward transfer) 3. Price is fixed and determinable (no price contingencies) 4. Collection is reasonably assured (standard collection terms)

Question 167

Q666. Revenue from the sales of products or the disposals of assets is recognized on the date of sale (delivery date) 4 criteria apply for a sale to take place

Answer 167

A666. 1. delivery of goods or setting aside goods ordered 2. transfer of legal title 3. Asset use 4. services rendered

Question 168

Q667. IFRS revenue recognition (4 types of revenue)

Answer 168

A667. 1. Sale of Goods 2. Rendering of Services 3. Interest, Royalties & Dividends 4. Construction contracts Revenue recognized when cost is measured reliably and probable that economic benefit will flow to the entity. others include risk & reward, not retain managerial involvement, and stage of completion.

Question 169

Q668. Multiple Element Arrangement (US GAAP)

Answer 169

A668. Sale contract includes multiple products or services. the Fair Value of the contract must be allocated to separate contract elements.

Question 170

Q669. Exceptions and Other Special Accounting Treatments (7)

Answer 170

A669. 1. Deferred Credits 2. Installment Sales 3. Cost Recovery Method 4. Nonmonetary Exchanges 5. Involuntary Conversions 6. Net Method for Accounting for Trade (Sales) Discounts 7. Percentage of Completion Contract Accounting

Question 171

Q670. Deferred Credits

Answer 171

A670. Liability = Earn it or Return it Cash is received before it is earned Examples…prepaid interest income, prepaid rental income, prepaid royalty income

Question 172

Q671. Installment Sales

Answer 172

A671. (not GAAP) Revenue is recognized as collections are made.

Question 173

Q672. Cost Recovery Method

Answer 173

A672. (not GAAP) No profit is recognized on a sale until all costs have been recovered.

Question 174

Q673. Nonmonetary Exchanges

Answer 174

A673. Recognition of revenue depends upon the type of exchange.

Question 175

Q674. percentage of completion contract accounting

Answer 175

A674. revenue is recognized as production takes place for long term constructions contracts having cost that can be reasonable estimated. If cost cannot be reasonably estimated the completed contract method must be used.

Question 176

Q675. Expenses are…

Answer 176

A675. Expenses are reductions of assets and/or increases of liabilities during a period of time. Recognized according to the matching principal

Question 177

Q676. Realization occurs…

Answer 177

A676. Realization occurs when the entity obtains cash or the right to receive cash or has converted a noncash resource into cash. (really happens in the real world)

Question 178

Q677. Matching Principle

Answer 178

A677. Matching of revenues and costs is the simultaneous or combined recognition of revenues ad expenses that results directly and jointly from the same transactions or events.

Question 179

Q678. Accrual Accounting

Answer 179

A678. Accrual Accounting is required by GAAP and is the process of employing the revenue recognition rule and matching principle to the recognition of revenues and expenses.

Question 180

Q679. percentage of completion contract accounting

Answer 180

A679. revenue is recognized as production takes place for long term constructions contracts having cost that can be reasonable estimated. If cost can not be reasonably estimated the completed contract method must be used.

Question 181

Q680. Accrued Assets (or accrued revenues) represents

Answer 181

A680. The recognition of an Accrued Assets (or accrued revenues) (i.e. interest receivable ) represents revenue recognized or earned through the passage of time (or other criteria) not yet paid to the entity. Earned not paid by client

Question 182

Q681. Accrued Liabilities (or accrued expenses) represents

Answer 182

A681. Accrued Liabilities (or accrued expenses) represents expenses recognized or incurred through the passage of time (or other criteria) but not yet paid by the entity. Example: Accrued interest payable, accrued wages…

Question 183

Q682. Estimated Liabilities represent

Answer 183

A682. Estimated Liabilities represent the recognition of probable future changes that result from prior act. Example: the estimated liability of warranties, trading stamps or coupons.

Question 184

Q683. Expired Cost are..

Answer 184

A683. Expired cost are costs that expire during the period and have no future benefit Example: insurance expense, cost of goods sold, period costs such as selling, general and administrative expenses.

Question 185

Q684. Unexpired costs should…

Answer 185

A684. Unexpired costs should be capitalized and matched against future revenues. Deferred charges Example: fixed asset and inventory stay on the balance sheet (for now)

Question 186

Q685. CAP - Committee on Accounting Procedure

Answer 186

A685. part-time committee, accounting research bulletins 39-59

Question 187

Q686. Accounting Prin Board APB,

Answer 187

A686. another part time - determined GAAP 59-73

Question 188

Q687. FASB

Answer 188

A687. 1973 On

Question 189

Q688. Statements of Financial Standards (SFAS)

Answer 189

A688. 1 - These statements establish GAAP, issued after research, discussion and public comments

Question 190

Q689. FASB Interpretations

Answer 190

A689. 2 - Clarify GAAP. addressing issues that may be conflicting or ambiguous

Question 191

Q690. Technical Bulletins

Answer 191

A690. 3 expand upon or further clarify GAAP because of problems that may exist in accounting or reporting under the standard or interpretation

Question 192

Q691. Statements of Accounting Concepts SFAC

Answer 192

A691. 4 establish the objectives and concepts for use by the FASB in developing accounting and reporting standards. Do not establish GAAP

Question 193

Q692. Emerging issues Task Force Statements

Answer 193

A692. 5 - address emergent issues and may show how to account for specific or unusual applications of GAAP

Question 194

Q693. FASB Implementation Guides

Answer 194

A693. 6 questions and answers - nearly no authority

Question 195

Q694. Hierarchy of sources of GAAP

Answer 195

A694. 1. SFAS 2. FASB Interpretations 3. Technical Bulletins 4. SFAC 5. EITF 6. FASB Implementation Guides

Question 196

Q695. Hierarchy of Sources of GAAP 2

Answer 196

A695. 1. Accounting Research Bulletins (ABR) 2. Accounting Principles Board Opinions (APBO) 3. FASB Statement of Financial Accounting Standards 4. FASB Staff Positions 5. FASB Interpretations 6. FASB Statement Implementation Issues BOSSII

Question 197

Q696. SFAC No. 2 Hierarchy

Answer 197

A696. 1. Understandable 2. Relevant 3. Reliable 4. Comparable 5. Consistent 6. Material 7. Less costly than benefit provided

Question 198

Q697. SFAC No. Constraints

Answer 198

A697. 1. Costs and Benefits - benefits of accounting information must be greater than cost. 2. Materiality - the information must be material - this information important to make decisions

Question 199

Q698. Understandability

Answer 199

A698. understandable to those with reasonable info, effort

Question 200

Q699. Usefulness (Primary quality of decision usefulness)-

Answer 200

A699. primary quality of accounting information can be broken down by Relevance and Reliability

Question 201

Q700. Relevance (3)

Answer 201

A700. 1. Predictive Value - assist users in past/pre/future 2. Feedback Value - confirm or readjust 3. Timeliness

Question 202

Q701. Reliability (3)

Answer 202

A701. 1. Neutrality 2. Representational Faithfulness - information is valid 3. Verifiability - objective

Question 203

Q702. Secondary Information Characteristics (2)

Answer 203

A702. 1. Comparability - compare instances 2. Consistency -from period to period.

Question 204

Q703. SFAC No. 3

Answer 204

A703. Elements of Financial Statements of a Business Replaced by 6

Question 205

Q704. SFAC No. 5

Answer 205

A704. Recognition and Measurement in the Financial Statements - what and when information in Financial Statements

Question 206

Q705. SFAC No. 5 - Full set of Financial Statements

Answer 206

A705. 1. Statement of Financial Positon - BS 2. Statement of Earnings - IS 3. Statement of Comprehensive Income 4. Statement of CF’s 5. Statement of Changes in OE

Question 207

Q706. SFAC No. 5 - Fundamental Recognition Criteria

Answer 207

A706. formally recording an item in FS 1. Definitions - Does it meet the def. of an element from SFA No. 6 2. Measurability 3. Relevance 4. Reliability

Question 208

Q707. SFAS No. 5 - Measurement Attributes for Ass and Liab (5)

Answer 208

A707. 1. Historical Cost 2. Current Cost 3. Net Realizable Value 4. Current Market Value 5. Present Value of Future Cash Flows

Question 209

Q708. SFAS No. 5 - Fundamental Assumptions(10)

Answer 209

A708. 1. Entry Assumption - Separate group of trans 9(corp etc.) 2. Going concern 3 - Monetary Unit - money appropriate 4. Periodically Assumption 5. Historical Cost Assumption - cost, not market value 6. Revenue Recognition Principal 7. Matching Principle 8. Accrual Accounting - not cash 9. - Full Disclosure Prin. - user gets info 10. Conservatism Principal

Question 210

Q709. Revenue Recognition Principal (2 to be recognition)

Answer 210

A709. 1. Earned 2. Realized or Realizable

Question 211

Q710. SFAS No. 6

Answer 211

A710. Is Elements of Financial Statements - the elements information for No. 1

Question 212

Q711. SFAS No. 6 - Elements of Financial Statements (10)

Answer 212

A711. 1. Comp Income - diff in equity- owner changes 2 - Rev 3 - Exp 4. Gains 5. Losses 6. Assets 7. Liabilities 8 Equity (of Net Assets) 9. Investments by owners 10. Distributions to Owners

Question 213

Q712. SFAC No. 7 -

Answer 213

A712. Using Cf information and PV in accounting measurements - PV of uncertainties and A and L

Question 214

Q713. SFAC No. 7 (6) -

Answer 214

A713. 1. Measurements Based on FCF Only - only talks about what can be det. using future CF’s 2. Five Elements of Present Value Measurement 3 Fair Value Objective - estimate fair value if can’t find in market. 4. Present Value Computations 5. Liability Measurement considers Additional Factors 6. Changes in Estimated CF Using the Catch-up Approach

Question 215

Q714. SFAC No. 7 - five Elements of PV Measurement (5) -

Answer 215

A714. five elements of PV measurement that are bases of 7 1. estimate of FCF’s 2. Expectations about timing variations 3 - Time Value of Money (RFR of int.) 4. The Price for Bearing Uncertainty 5. Other - liq, market imperfections.

Question 216

Q715. SFAC No. 7 Present Value Computations (2)

Answer 216

A715. 1. Traditional Approach - one discount rate) - Cf s don’t vary 2. Expected CF Approach - uses RFR and focuses on future CF’s

Question 217

Q716. SFAC No. 7 - Expected CF Approach (2)

Answer 217

A716. 1. Expected CF - CF and prob. 2. Risk and Uncertainty Adjustments to CF’s - adjustments for uncertainty

Question 218

Q717. SFAS No. 7 - Liability Measurement Considers Additional Factors

Answer 218

A717. 1. Costs to Settle 2. Credit Standing of company

Question 219

Q718. SFAS No. 7 - Catch-up Approach

Answer 219

A718. Catch-up Approach - adjust carrying amount of A or L to the PV determined with revised est. and discount using original effective rate.

Question 220

Q719. Net Income - 1. Uses and Terminology

Answer 220

A719. Uses - Profitability, Value, Credit Worthiness Terminology

Question 221

Q720. Net Income - 1. Terminology (3)

Answer 221

A720. 1. Cost and Unexpired Costs 2. Gross Concept (Revenue and Exp) 3. Net Concept

Question 222

Q721. Net Income - 1. Terminology – Cost and Unexpired Costs (3)

Answer 222

A721. 1. Cost - amount paid 2. Unexpired Costs - will be charged, allocated in future 3. Examples

Question 223

Q722. Net Income - 1. Terminology - Unexpired Cost Examples

Answer 223

A722. 1. Inventory ====> COGS 2. Prepaid ====> Ins 3. bk value of Assets ====> Depreciation Expense Cost of Patents

Question 224

Q723. Gross Concept (Revenue and Expense)

Answer 224

A723. 1. Revenue - are reported at their gross amts (less returns and disc) 2. Exp - gross amts.

Question 225

Q724. Net Concept

Answer 225

A724. Gains - net - proceeds less book value - no in ord business Loss - net - Not in ordinary course of bus.

Question 226

Q725. Reported in IS (3)

Answer 226

A725. Income(loss) - from continuing operations - Ops, Non-ops and tax - Report Gross 2. Inc/Loss from Discontinued Ops - Net of Tax 3. Extraordinary Items (net of tax)

Question 227

Q726. Reported on RE

Answer 227

A726. Cum effect of change in accounting prin. - net of tax

Question 228

Q727. IDEA

Answer 228

A727. I - Income from Continuing Ops - gross D - Discontinued Ops - Net E - Extraordinary items -net A - Acct Prin Change - net ( in RE Statement, not IS)

Question 229

Q728. Single Step Income Statement

Answer 229

A728. All expense out of Revenue - simple - no classification

Question 230

Q729. Multi Step Inc. Statement

Answer 230

A729. Operating revenue and expense separately from non- operating revenue and expense - and other gains and losses enhanced info

Question 231

Q730. Inventory Cost consists of

Answer 231

A730. Purchase price, freight in

Question 232

Q731. Selling Expense consists of

Answer 232

A731. Freight out, salaries and commissions, advertising

Question 233

Q732. General & Administrative consists of

Answer 233

A732. Officers’ salaries, accounting and legal, insurance

Question 234

Q733. Non-operating consists of

Answer 234

A733. Auxiliary activities, interest expense

Question 235

Q734. SFAS No. 144

Answer 235

A734. Discontinued operations are still reported separately from continuing operations in the income statement according to the IDEA mnemonic, net of tax.

Question 236

Q735. Discontinued operations

Answer 236

A735. The (normally) loss from discontinued operations can consist of an impairment loss, a gain/loss from actual operations, and a gain/loss on disposal.

Question 237

Q736. Discontinued operations allocation

Answer 237

A736. In time period incurred (no anticipated)

Question 238

Q737. COMPONENT OF AN ENTITY

Answer 238

A737. A component of an entity is a part of an entity (the lowest level) for which operations and cash flows can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the entity.

Question 239

Q738. COMPONENT OF AN ENTITY (5)

Answer 239

A738. 1. An operating segment, 2. A reportable segment (as those terms are defined in segment reporting), 3. A reporting unit (as that term is defined in goodwill impairment testing), 4. A subsidiary, or 5. An asset group.

Question 240

Q739. ASSET GROUP

Answer 240

A739. An asset group is a collection of assets to be disposed of together as a group in a single (disposal) transaction and the liabilities directly associated with those assets that will be transferred in that same transaction.

Question 241

Q740. A component of a business is classified as “held for sale” in the period in which ALL of the following criteria are met: (6)

Answer 241

A740. 1. Management commits to a plan to sell the component. 2. The component is available for immediate sale in its present condition. 3. An active program to locate a buyer has been initiated. 4. The sale of the component is probable and the sale is expected to be complete within one year. 5. The sale of the component is being actively marketed. 6. Actions required to complete the sale make it unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Question 242

Q741. The results of operations of a component of an entity will be reported in discontinued operations if either the component: (2)

Answer 242

A741. 1. Has been disposed of, or 2. Is classified as held for sale.

Question 243

Q742. DO Conditions that must be present

Answer 243

A742. All related costs shall be recognized when the obligations to others exist, not necessarily in the period of commitment to a plan.

Question 244

Q743. DO Both of the following conditions must be met in order to report in discontinued operations the results of operations of a component that has been disposed of or is held for sale:

Answer 244

A743. 1. Eliminated from Ongoing Operations 2. No Significant Continuing Involvement

Question 245

Q744. Types of Items Included in Results of Discontinued Operations (3)

Answer 245

A744. a. Results of Operations of the Component b. Gain or Loss on Disposal of the Component c. Impairment Loss (and Subsequent Increases in Fair Value) of the Component

Question 246

Q745. IDO mpairment Loss (and Subsequent Increases in Fair Value) of the Component

Answer 246

A745. (1) Initial and Subsequent Impairment Losses (2) Subsequent Increases in Fair Value

Question 247

Q746. DO Initial and Subsequent Impairment Losses

Answer 247

A746. A loss is recognized for recording the impairment of the component (i.e., any initial or subsequent write-down to fair value less costs to sell).

Question 248

Q747. DO Subsequent Increases in Fair Value

Answer 248

A747. A gain is recognized for any subsequent increase in fair value minus the costs to sell (but not in excess of the previously recognized cumulative loss).

Question 249

Q748. DO Report in the Period Disposed of or Held for Sale

Answer 249

A748. The results of discontinued operations of a component are reported in discontinued operations (for the current period and for all prior periods presented) in the period the component is either disposed of or is held for sale. The results of subsequent operations of a component classified as held for sale are reported in discontinued operations in the period in which they occur.

Question 250

Q749. DO Depreciation and Amortization

Answer 250

A749. Assets within the component are no longer depreciated or amortized.

Question 251

Q750. DO - ANTICIPATED FUTURE GAINS OR LOSSES

Answer 251

A750. A gain or loss not previously recognized that results from the sale of the component is recognized at the date of sale and not before (i.e., gains or losses anticipated to occur in future periods are not recognized until they occur).

Question 252

Q751. DO - SUBSEQUENT ADJUSTMENTS TO AMOUNTS PREVIOUSLY REPORTED

Answer 252

A751. Adjustments to amounts previously reported in discontinued operations that are directly related (see definition in item E.2, below) to the disposal of a component of an entity in a prior period are classified in the current period in discontinued operations. 1. Examples a. Resolution of contingencies related to terms of the disposal transaction (e.g., purchase price adjustments and indemnification issues) b. Resolution of contingencies directly related to the operations the component before it was disposed of (e.g., warranty obligations and environmental responsibilities)

Question 253

Q752. DO - Definition of “Directly Related”

Answer 253

A752. In order for a settlement to be considered directly related to a component of an entity, it must: a. Have a demonstrated cause-and-effect relationship and b. Occur no later than one year after the date of the disposal transaction (unless circumstances beyond the control of the entity exist).

Question 254

Q753. DO - MEASUREMENT AND VALUATION

Answer 254

A753. A component classified as held for sale is measured at the lower of its carrying amount or fair value less costs to sell. Costs to sell are the incremental direct costs to transact the sale.

Question 255

Q754. DO - PRESENTATION AND DISCLOSURE

Answer 255

A754. 1. Present as a Separate Component of Income The results of discontinued operations, net of tax, are reported as a separate component of income before extraordinary items. 2. Disclose in Face or in Notes A gain or loss recognized on the disposal shall be disclosed either on the face of the income statement or in the notes to the financial statements.

Question 256

Q755. IDEA E (Extraordinary Items) Defined (4)

Answer 256

A755. According to APB Opinion No. 30, extraordinary items are transactions and other events that are: 1. Material in nature, 2. Of a character significantly different from the typical or customary business activities, 3. Not expected to recur in the foreseeable future, and 4. Not normally considered in evaluating the ordinary operating results of an enterprise.

Question 257

Q756. EI - HOW TO CLASSIFY

Answer 257

A756. Extraordinary items are usually determined by informed professional judgment, taking into consideration all the facts involved in a particular situation. Since the issuance of SFAS No. 145, the provisions of APB Opinion No. 30 dictate the classification of all extraordinary items.

Question 258

Q757. EI - SEPARATE DISCLOSURE

Answer 258

A757. Extraordinary items must be separately disclosed in the income statement, net of any related tax effects, after discontinued operations.

Question 259

Q758. EI - EXAMPLES OF EXTRAORDINARY ITEMS (4)

Answer 259

A758. 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 4. Certain gains or losses from extinguishment of long- term debt, provided they are not part of the entity’s recurring operations and, thus, meet the criteria of APB Opinion No. 30 (per SFAS No. 145).

Question 260

Q759. EI - EXAMPLES OF NONEXTRAORDINARY ITEMS

Answer 260

A759. The following gains or losses are NOT extraordinary (they are presented as a separate component of “continuing operations”): 1. Gain or loss from sale or abandonment of property, plant, or equipment used in the business 2. Large writedowns or writeoffs of: a. Receivables b. Inventories c. Intangibles (including goodwill) d. Long-term securities (permanent decline) 3. Gain or loss from foreign currency transactions or translation, whether from major devaluations or otherwise (provided these occur on a regular basis as part of normal business operations) 4. Losses from major strike by employees 5. Long-term debt extinguishments that are part of a common management

Question 261

Q760. MATERIAL UNUSUAL OR INFREQUENT ITEMS

Answer 261

A760. Items of income or loss that are either unusual or infrequent are not extraordinary (e.g., gain on the sale of a factory building). If material, these items should be reported as a separate line item as part of income from continuing operations (and not net of tax). The nature of the item and the financial effects should be disclosed on the face of the income statement or in the footnotes.

Question 262

Q761. IDEA - Accounting Principle Change (3)

Answer 262

A761. GENERAL Accounting changes are broadly classified as: (i) Changes in accounting estimate, (ii) Changes in accounting principle, and (iii) Changes in accounting entity. Note that prior period adjustments are not considered accounting changes. II. CHANGES

Question 263

Q762. APC - CHANGES IN ACCOUNTING ESTIMATE (PROSPECTIVELY)

Answer 263

A762. A change in accounting estimate occurs when it is determined that the estimate previously used by the company is incorrect.

Question 264

Q763. APC - EVENTS RESULTING IN ESTIMATE CHANGES (6)

Answer 264

A763. 1. Changes in the lives of fixed assets 2. Adjustments of year-end accrual of officers’ salaries and/or bonuses 3. Write-downs of obsolete inventory 4. Material non-recurring IRS adjustments 5. Settlement of litigation 6. Changes in accounting principle that are inseparable from a change in estimate (e.g., a change from the installment method to immediate recognition method because uncollectible accounts can now be estimated)

Question 265

Q764. APC - REPORTING A CHANGE IN ESTIMATE (2)

Answer 265

A764. 1. Prospectively 2. Change in Estimate Affecting Future Periods

Question 266

Q765. Prospectively

Answer 266

A765. Changes in accounting estimate are accounted for prospectively (i.e., implement in the current period and continue in future periods). They do not affect previous periods (i.e., no effect on previously reported retained earnings).

Question 267

Q766. Change in Estimate Affecting Future Periods

Answer 267

A766. If a change in accounting estimate affects several future periods (e.g., a revision of service lives of depreciable assets), the effect on income before extraordinary items, net income, and the related per share information for the current year should be disclosed in the notes to the financial statements. Note: Changes in ordinary accounting estimates (e.g., uncollectible accounts and inventory adjustments) usually made each period do not have to be disclosed unless they are material.

Question 268

Q767. CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION)

Answer 268

A767. A change in accounting principle is a change in accounting from one acceptable method of GAAP to another acceptable method of GAAP (i.e., GAAP to GAAP).

Question 269

Q768. CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION) - RULE OF PREFERABILITY

Answer 269

A768. An accounting principle may be changed only if the alternative principle is preferable and more fairly presents the information. Justification for the change may stem from certain current and future AICPA Statements of Position and AICPA Industry and Audit and Accounting Guides.

Question 270

Q769. CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION) - NONRECURRING CHANGES

Answer 270

A769. An accounting change should not be made for a transaction or event in the past that has been terminated or is nonrecurring.

Question 271

Q770. CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION) -EFFECTS OF A CHANGE - Direct Effects

Answer 271

A770. The direct effects of a change in accounting principle are adjustments that would be necessary to restate the financial statements of prior periods.

Question 272

Q771. CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION) -EFFECTS OF A CHANGE - Indirect Effects

Answer 272

A771. The indirect effects of a change in accounting principle are differences in nondiscretionary items based on earnings (e.g., bonuses) that would have occurred if the new principle had been used in prior periods.

Question 273

Q772. CHANGES IN ACCOUNTING PRINCIPLE (RETROSPECTIVE APPLICATION) -EFFECTS OF A CHANGE - Cumulative Effect - 91

Answer 273

A772. If non-comparative financial statements are being presented, then the cumulative effect of a change in accounting principle is equal to the difference between the amount of beginning retained earnings in the period of change and what the retained earnings would have been if the accounting change had been retroactively applied to all prior affected periods. It includes direct effects and only those indirect effects that are entered in the accounting records. If comparative financial statements are being presented, then the cumulative effect is equal to the difference between beginning retained earnings in the first period presented and what retained earnings would have been if the new principle had been applied to all prior periods.

Question 274

Q773. REPORTING CHANGES IN AN ACCOUNTING PRINCIPLE - General Rule - 91

Answer 274

A773. The general rule is that such changes should be recognized by adjusting beginning retained earnings in the earliest period presented for the cumulative effect of the change, and, if prior period financial statements are presented, they should be restated (retrospective application). There are, of course, exceptions to this general rule.

Question 275

Q774. 1. Exceptions to the General Rule a. Impracticable to Estimate

Answer 275

A774. If it is considered “impractical” to accurately calculate this cumulative effect adjustment, then the change is handled prospectively (like a change in estimate). An example of a change handled in this manner is a change in inventory cost flow assumption to LIFO. Since a cumulative effect adjustment to LIFO would require the reestablishment and recalculation of old inventory layers, it is considered impractical to try and rebuild those old cost layers. This change is therefore handled prospectively. The beginning inventory of the year of change is the first LIFO layer. Additional LIFO layers are added on from that point forward.

Question 276

Q775. 1. Exceptions to the General Rule a. Impracticable to Estimate

Answer 276

A775. dead

Question 277

Q776. 1. Exceptions to the General Rule b. Change in Depreciation Method

Answer 277

A776. A change in the method of depreciation, amortization, or depletion is considered to be both a change in accounting principle and a change in estimate. These changes should be accounted for as changes in estimate and are handled prospectively. The new depreciation method should be used as of the beginning of the year of the change in estimate and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings.

Question 278

Q777. 2. Applications of the General Rule (3)

Answer 278

A777. a. The amount of cumulative effect to be reported on the retained earnings statement is the difference between: (1) Retained earnings at the beginning of the earliest period presented, and(2) Retained earnings that would have been reported at the beginning of the earliest period presented if the new accounting principle had been applied retrospectively for all prior periods, by recognizing only the direct effects and related income tax effect. b. The new accounting principle is used for all periods presented (prior periods are restated). c. If an accounting change is not considered material in the year of change but is reasonably expected to become material in later periods, it should be fully disclosed in the year of change.

Question 279

Q778. CHANGES IN ACCOUNTING ENTITY (RETROSPECTIVE APPLICATION)

Answer 279

A778. A change in accounting entity occurs when the entity being reported on has changed composition. Examples include consolidated or combined financial statements that are presented in place of statements of the individual companies and changes in the companies included in the consolidated or combined financial statements from year to year.

Question 280

Q779. CHANGES IN ACCOUNTING ENTITY (RETROSPECTIVE APPLICATION) - RESTATEMENT TO REFLECT INFORMATION FOR THE NEW ENTITY (IF COMPARATIVE FINANCIAL STATEMENTS ARE PRESENTED) -

Answer 280

A779. If a change in accounting entity occurs in the current year, all previous financial statements that are presented in comparative financial statements along with the current year should be restated to reflect the information for the new reporting entity.

Question 281

Q780. CHANGES IN ACCOUNTING ENTITY (RETROSPECTIVE APPLICATION) - FULL DISCLOSURE

Answer 281

A780. Full disclosure of the cause and nature of the change should be made, including changes in income before extraordinary items, net income, and retained earnings.

Question 282

Q781. Prior period adjustments consist of: (3)

Answer 282

A781. (i) Corrections of errors in the financial statements of prior periods, (ii) Retroactive restatements required by new GAAP pronouncements, and (iii) Changes from a non-GAAP method of accounting to a GAAP method of accounting (e.g., cash basis to accrual basis), which is a specific correction of an error.

Question 283

Q782. Corrections if the year is presented int the statements

Answer 283

A782. If comparative financial statements are presented and financial statements for the year with the error are presented, merely correct the error in those prior financial statements.

Question 284

Q783. Corrections if the year is NOT presented int the statements (if too old)

Answer 284

A783. If comparative financial statements are presented and financial statements for the year with the error are not presented (e.g., because it is too far back in years), adjust (net of tax) the opening retained earnings of the earliest year presented.

Question 285

Q784. Comprehensive Incom PUFE def.

Answer 285

A784. P ension minimum liability adjustments U nrealized gains and losses (available-for-sale securities) F oreign currency items E ffective portion cash flow hedges

Question 286

Q785. COMPREHENSIVE INCOME

Answer 286

A785. Comprehensive income is the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Net income + Other comprehensive income Comprehensive income

Question 287

Q786. Net income includes the following items: (3)

Answer 287

A786. 1. Income from continuing operations 2. Discontinued operations 3. Extraordinary items

Question 288

Q787. Other comprehensive income

Answer 288

A787. Other comprehensive income includes those items in comprehensive income that are excluded from net income. Prior to the implementation of SFAS No. 130, these types of items were reported as separate line items (components) of owners’ equity. SFAS No. 130 grouped all of these items together and called the changes in them for the period “Other Comprehensive Income.”

Question 289

Q788. Other comprehensive income (4) special items by nature, for example:

Answer 289

A788. 1. Pension Changes in Funded Status 2. Unrealized Gains and Losses 3. Foreign Currency Items 4. Effective Portion of Cash Flow Hedges

Question 290

Q789. OCI - Pension Changes in Funded Status

Answer 290

A789. Changes in the funded status of a pension plan due to gains or losses, prior service costs, and net transition assets or obligations must be recognized in other comprehensive income in the year the changes occur. All gains or losses, prior service costs, and transition assets or obligations are included in other comprehensive income until recognized as a component of net periodic benefit cost. (Pensions are covered in detail in lecture F-6, later in the course.)

Question 291

Q790. OCI - Unrealized Gains and Losses (3)

Answer 291

A790. The following types of unrealized gains and losses on certain investments in debt and a. Unrealized holding gains and losses on “available-for- sale securities.” b. Unrealized holding gains and losses that result from a debt security being transferred into the “available-for-sale” category from “held-to-maturity.” c. Subsequent decreases or increases in the fair value equity securities (per SFAS No. 115) are reported as components of other comprehensive income. (All are covered in detail in lecture F-3, later in the course.)

Question 292

Q791. Foreign Currency Items

Answer 292

A791. Foreign currency translation adjustments and gains and losses on foreign currency transactions that are designated as (and are effective as) economic hedges of a net investment in a foreign entity (part of SFAS No. 133 and discussed in the F-7 lecture on derivatives and other financial instruments) are reported as a component of other comprehensive income. (Foreign currency and its related effects are covered in detail in lecture F-2, later in the course.)

Question 293

Q792. Effective Portion of Cash Flow Hedges

Answer 293

A792. Cash flow hedges are part of SFAS No. 133 and are discussed in the F-7 lecture on derivatives and other financial instruments, later in the course. The effective portion of a cash flow hedge is reported as a component of other comprehensive income.

Question 294

Q793. RECLASSIFICATION ADJUSTMENTS

Answer 294

A793. Adjustments for items that are displayed as part of net income for a period that had previously been displayed as part of other comprehensive income are referred to as reclassification adjustments. These adjustments may be displayed on the face of the financial statement in which comprehensive income is reported or disclosed in the notes to the financial statements.

Question 295

Q794. ACCUMULATED OTHER COMPREHENSIVE INCOME

Answer 295

A794. Accumulated other comprehensive income is a component of equity that includes the total of other comprehensive income for the period and previous periods. Other comprehensive income for the current period is “closed” to this account, which is reconciled each period similar to the manner in which retained earnings is reconciled.

Question 296

Q795. 3 format taht can be used for comp income

Answer 296

A795. 1. Below the total for net income in a statement that reports results of operations; 2. In a separate statement of comprehensive income that begins with net income; or 3. In a statement of changes in equity.

Question 297

Q796. Other comp income does not apply to: (for financial statements)

Answer 297

A796. non profs and those that don’t have comp. income

Question 298

Q797. if you report other comp income in owner’s equity, you must:

Answer 298

A797. you must also report accumulated comp income ( doesn’t need to be broken down)

Question 299

Q798. 2 ways to report comp income

Answer 299

A798. Components of other comprehensive income may be reported either (i) net of tax or (ii) before related tax effects with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items.

Question 300

Q799. comp income - INCOME TAX EXPENSE OR BENEFIT

Answer 300

A799. The amount of income tax expense or benefit allocated to each component of other comprehensive income is disclosed either on the face of the statement in which those components are displayed or in the notes to the financial statements.

Question 301

Q800. comp income - interim period reporting

Answer 301

A800. A total for comprehensive income shall be reported in condensed financial statements of interim periods issued to shareholders.

Question 302

Q801. comp income - REQUIRED DISCLOSURES - all three must disclose: (4)

Answer 302

A801. 1. The tax effects of each component included in (current) “Other Comprehensive Income,” either as part of the statement presentation or in the notes to the financial statements.★2. The accumulated balances of components of “Other Comprehensive Income” (e.g., pension funded status changes, unrealized holding gains/losses on securities, foreign currency items, and the effective portion of cash flow hedges).★(a) The accumulated balances by component may be shown on the balance sheet, in the statement of changes in equity, or in the notes to the financial statements. ★3. Total “Accumulated Other Comprehensive Income” in the balance sheet as an item of “Equity” (see “required format” on above example).★4. The reclassification adjustments, which are made to avoid double counting in “Other Comprehensive Income” items that are displayed in net income for the current year★(e.g., previously reported unrealized gains on available-for-sale securities that were realized during the current year).

Question 303

Q802. BS - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Answer 303

A802. GAAP requires that a description of all significant policies should be included as an integral part of the financial statements. The preferred presentation is to include the “Summary of Significant Accounting Policies” as the first or second note to the financial statements. Policies presented in other notes should not be duplicated.

Question 304

Q803. BS - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Identify and describe: (4)

Answer 304

A803. Identify and describe: a. Principles and methods b. Criteria c. Policies d. Pricing

Question 305

Q804. BS - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Items not included in this footnote: (5)

Answer 305

A804. Items not included in this footnote: a. Composition of accounts b. Amounts in dollars of account balances c. Details relating to changes in accounting principles d. Dates of maturity and amounts of long-term debt e. Yearly computation of depreciation, depletion and amortization

Question 306

Q805. REMAINING NOTES TO THE FINANCIAL STATEMENTS

Answer 306

A805. The remaining notes contain all other information relevant to decision makers (e.g., investors, creditors, etc.) These notes are used to disclose facts not presented in either the body of the financial statements or in the “Summary of Significant Accounting Policies.” Examples of relevant note information include the following:

Question 307

Q806. REMAINING NOTES TO THE FINANCIAL STATEMENTS - List (6)

Answer 307

A806. 1. Changes in stockholders’ equity including capital stock, paid-in capital, retained earnings, treasury stock, stock dividends and other capital changes; 2. Required marketable securities disclosure including carrying value and gross unrealized gains and losses; 3. Contingency losses; 4. Contractual obligations, including restrictions on specific assets or liabilities; 5. Pension plan description; and 6. Post-balance sheet disclosures of certain events that occurred before the financial statements were issued.

Question 308

Q807. INTERIM FINANCIAL REPORTING

Answer 308

A807. Interim financial reporting is generally concerned with the quarterly reports that public companies must file with the SEC. Generally accepted accounting principles that were used in the most recent annual report of an enterprise should be applied to interim financial statements of the current year, unless a change in accounting principle is adopted in the current year.

Question 309

Q808. INTERIM FINANCIAL REPORTING - TIMELINESS OVER RELIABILITY

Answer 309

A808. For interim reporting only, timeliness is emphasized over reliability.

Question 310

Q809. INTERIM FINANCIAL REPORTING - AN INTEGRAL PART OF ANNUAL FINANCIAL STATEMENTS

Answer 310

A809. Interim financial statements must be viewed as an integral part of the annual financial statements. Because interim financial statements generally are not audited, each statement presented should be marked “unaudited.”

Question 311

Q810. Segment Reporting -

Answer 311

A810. SFAS No. 131 significantly increased the items of disclosure that previously existed in segment reporting. The objective of requiring these disclosures was to provide information on the business activities and the economic environment of a company to help users of the financial statements:

Question 312

Q811. Segment Reporting - List (3) - increases of disclosures

Answer 312

A811. (i) Better understand the enterprise’s performance, (ii) Better assess its prospects for future net cash flows, and (iii) Make more informed judgments about the enterprise as a whole. In general, an enterprise is required to report a measure of segment profit or loss, segment assets, and certain related items, but is not required to report segment cash flow or segment liabilities.

Question 313

Q812. Segment Reporting - REQUIRED DISCLOSURES FOR ALL PUBLIC ENTERPRISES (4)

Answer 313

A812. In order to conform with GAAP, financial statements for public business enterprises must report segment information about a company’s: 1. Operating Segments (Annual and Interim) 2. Products and Services 3. Geographic Areas 4. Major Customers

Question 314

Q813. Segment Reporting - USE SAME ACCOUNTING PRINCIPLES AS MAIN FINANCIAL STATEMENTS

Answer 314

A813. The required financial statement information is essentially a disaggregation of the entity’s regular financial statements. The accounting principles used in preparing the financial statements should be used for the segment information. Segment information presented must be reconciled to the related aggregate amounts in the financial statements.

Question 315

Q814. Segment Reporting - INTERCOMPANY TRANSACTIONS NOT ELIMINATED FOR REPORTING

Answer 315

A814. It is important to remember that transactions between the segments of an enterprise are not eliminated as in consolidation between the parent company and subsidiaries.

Question 316

Q815. Segment Reporting - SCOPE (PUBLIC COMPANIES ONLY)

Answer 316

A815. Segment reporting applies to public companies only. It does not apply to not-for-profit organizations, nonpublic companies, or separate financial statements of members of a consolidated group if both the separate company statements and the consolidated or combined financial statements are included in the same financial report.

Question 317

Q816. OPERATING SEGMENTS A. DEFINITION (3)

Answer 317

A816. (i) That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same enterprise), (ii) Whose operating results are regularly reviewed by the enterprise’s “Chief Operating Decision Maker” to make decisions about resources to be allocated to the segment and assess its performance, and (iii) For which discrete financial information is available. The definition of a segment depends on how management uses information, which is called the management approach method. For example, management

Question 318

Q817. NOT EVERY ENTERPRISE IS AN OPERATING SEGMENT (2)

Answer 318

A817. Corporate Headquarters Not an Operating Segment A corporate headquarters or certain functional departments may not earn revenues or may earn revenues that are only incidental to the activities of the enterprise and would, therefore, not be operating segments. 2. Pension Plan Not an Operating Segment

Question 319

Q818. Segments may be aggregated if: (7)

Answer 319

A818. (i) aggregation is consistent with the objective and principles of segment reporting, (ii) the segments have similar economic characteristics, and (iii) the segments are similar in: 1. The nature of the products and services, 2. The nature of the production processes, 3. The type or class of customer for their products and services, 4. The methods used to distribute their products or provide their services, and 5. If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

Question 320

Q819. QUANTITATIVE THRESHOLDS FOR REPORTABLE SEGMENTS

Answer 320

A819. 1. 10% rule 2. 75% rule 3. 90% rule

Question 321

Q820. 10% rule (3)

Answer 321

A820. Revenue 2. A segment meets the size test if the absolute amount of its reported profit or loss is 10% or more of the greater, in absolute amount, of (1) The combined reported profit of all operating segments that did not report a loss, or (2) The combined reported loss of all operating segments that did report a loss. 3. Assets

Question 322

Q821. 75% “Reporting Sufficiency” Test

Answer 322

A821. If the total of external (consolidated) revenue reported by operating segments constitutes less than 75% of external (consolidated) revenue, additional operating segments need to be identified as reportable segments, even if they do not meet the above three tests, until at least 75% of external (consolidated) revenue is included in reportable segments. The practical limit to the number of segments is 10, which is not a precise limit.

Question 323

Q822. 90% “Single Industry Dominance” Test

Answer 323

A822. There is no requirement to report any segment if a single segment accounts for 90% or more of the following combined amounts for all segments: a. Revenue, b. Reported profit or loss, and c. Assets.

Question 324

Q823. SEGMENT PROFIT (OR LOSS) DEFINED

Answer 324

A823. Revenues Less: Directly traceable costs Less: Reasonably allocated costs Operating Profit (or loss)

Question 325

Q824. Items Normally Excluded from Segment Profit (or Loss) (8)

Answer 325

A824. a. General corporate revenues b. General corporate expenses c. Interest expense (except for financial institutions) d. Income taxes e. Equity in earnings and losses of an unconsolidated subsidiary (i.e., under the equity method) f. Gains or losses from discontinued operations g. Extraordinary items h. Minority interest

Question 326

Q825. criterion for income expense allocation

Answer 326

A825. Income and expenses are not allocated to a segment unless they are included in the determination of segment profit or loss reported to the “Chief Operating Decision Maker.”

Question 327

Q826. A development-stage enterprise is one in which either: (2)

Answer 327

A826. (i) Principal operations have not yet commenced, or (ii) Principal operations have generated an insignificant amount of revenue (or a loss).

Question 328

Q827. A development-stage enterprise - (5)

Answer 328

A827. must issue the same statements plus A. Identify the financial statements as those of a development stage enterprise. B. In the balance sheet, describe cumulative net losses as “deficit accumulated during the development stage.” C. In the income statement, show revenues and expenses for each period being presented, and present a cumulative amount (generally of losses) from the company’s inception. D. In the statement of cash flows, include: E. In the statement of stockholders’ equity, include the following:

Question 329

Q828. development-stage enterprise -In the statement of cash flows, include:(2)

Answer 329

A828. 1. Cumulative amounts of cash inflows and cash outflows from the company’s inception, and 2. Current amounts of cash inflows and cash outflows for each period presented.

Question 330

Q829. In the statement of stockholders’ equity, include the following: (5)

Answer 330

A829. 1. Number of shares of stock (or other securities) issued, 2. Dates of issuance, and 3. Dollar amounts assigned. 4. If noncash consideration is involved in the issuance, then include: a. A description of the nature of the consideration, and b. The basis for its valuation.

Question 331

Q830. SFAS No. 157

Answer 331

A830. Before SFAS No. 157 was issued, GAAP standards included different definitions of fair value and little information regarding how to use those definitions. SFAS No. 157 standardizes the definition of fair value, establishes a framework for measuring fair value, and expands fair value disclosures. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and it applies to all other accounting pronouncements that require or permit fair value measurement

Question 332

Q831. SFAS No. 157 exceptions (3)

Answer 332

A831. A. SFAS No. 123(R), Share-Based Payment and related interpretative pronouncements, B. ARB No. 43, Chapter 4, “Inventory Pricing,” and C. Accounting pronouncements that permit measurements based on or using vendor-specific objective evidence of fair value. (Note that these pronouncements are beyond the scope of the CPA Exam.)

Question 333

Q832. Fair value: (8)

Answer 333

A832. Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.★1. Fair value is measured for a specific asset or liability, or a group of assets and/or liabilities.★2. Fair value is a market-specific measure, not an entity- specific measure.★3. Fair value is measured in the principal, or most advantageous, market for the asset or liability.★4. Fair value is an exit price (the price to sell an asset or transfer a liability), not an entrance price (the price to acquire an asset or assume a liability).★5. A fair value measure should reflect all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk.★6. Fair value does not include transaction costs, but may include transportation costs if location is an attribute of the asset or liability.★7. The fair value of an asset assumes the highest and best use of the asset.★8. The fair value of a liability should include the liability’s nonperformance risk, which is the risk that the obligation will not be fulfilled.

Question 334

Q833. Who is supposed to write GAAP by law ?

Answer 334

A833. It is the SEC, but traditionally the SEC has always allowed FASB to write GAAP

Question 335

Q834. FIrst the SEC gave AICPA the authority promulgate GAAP, and then later on to the APB (Accounting principles boards) What was the name of the committee, which they came up with ?

Answer 335

A834. First they give this authority to the AICPA, then the AICPA came up with the CAP. The committee on accounting procedure writes the accounting research bulletins. Then APB which is the accounting principles board came with their opinions and their interpretations.

Question 336

Q835. Who wrote GAAP after the AICPA and APB ?

Answer 336

A835. It is FASB. And FASB had SFAS and (FIN) financial interpretations. But now in 2011 FASB came along with accounting standards and codifications.

Question 337

Q836. What does the new 2011 ASC (accounting standard codification include and what does it exclude)

Answer 337

A836. ARB, APB opinions, SFAS, technical bulletins are all included. (Everything in category A to D) SFAC are excluded.

Question 338

Q837. What is the SFAC ?

Answer 338

A837. They are the rules for writing rules. They are not GAAP but they give guidance for writing GAAP. Not part of accounting standard codification which is GAAP

Question 339

Q838. What are the pervasive constraints ?

Answer 339

A838. Benefits have to outweigh cost. Then financial statements need to have understandability and decision usefulness.

Question 340

Q839. US GAAP Relevance :

Answer 340

A839. Predictive value Feedback value Timeliness

Question 341

Q840. Verifiability and representational faithfulness.

Answer 341

A840. Verifiability means supported by evidence. That is why you use historical cost. Representational faithfulness emphasizes substance over form. (Capital lease)

Question 342

Q841. Comparability and consistency are related to what ?

Answer 342

A841. relevance and reliability.

Question 343

Q842. Materiality:

Answer 343

A842. error or omission would affect the judgment of a reasonable person.

Question 344

Q843. What affects shareholders Equity ?

Answer 344

A843. Both revenues and expenses and gains and losses affect shareholder equity. Revenues and expenses affect both ongoing major and central operations. But gains and losses affect peripheral and incidental transactions. When you recognize something it means that it ends up on the financial statement.

Question 345

Q844. SFAC 7: USING CASH FLOW INFORMATION AND PV IN ACCOUNTING MEASUREMENTS.

Answer 345

A844. A framework using future cash flows as the basis for accounting measurements at initial recognition, in a fresh start measurement, interest method allocation. Guidance on measurement issues only, recognition issues are not addressed by SFAC 7.

Question 346

Q845. The interest method allocation:

Answer 346

A845. this is reporting conventions that use present value techniques in the absence of a fresh start measurement to compute changes in the carrying amount of an asset or the liability from one period to the next.

Question 347

Q846. Multiple deliverable revenue arrangements

Answer 347

A846. 1)The delivered item has value on a standalone basis. 2)If the arrangement includes a right of return for the delivered item, the undelivered item must be substantially in control of the vendor. If it meets both requirements the revenue arrangement is divided into separate units based on the relative selling prices.

Question 348

Q847. Research and development accounted for on the milestone basis : note the milestone method can only be used in R and D.

Answer 348

A847. The milestone method of accounting may be used in accounting for r and d in which revenue (payments) to the vendor is contingent on achieving one or more substantive milestones related to deliverables or units of accounting. (look at page 55 of textbook for more details). Under the milestone method when substantive milestone is achieve you then get to recognize all of the revenue.

Question 349

Q848. Who is the IASC

Answer 349

A848. The international accounting standards committee, they wrote international accounting standards. (IASC –> IAS, from 1973 to 2001.

Question 350

Q849. In addition the IASC also created the SIC, what is this ?

Answer 350

A849. In addition the IASC also created the SIC, (standard interpretations committee, that provided further interpretive guidance on accounting issues not addressed in the standards.

Question 351

Q850. In 2001 who replaced the IASC ? What is IFRIC

Answer 351

A850. In 2001 the IASB replaced the ISAC. The IASB adopted the IAS and interpretations issued by the SIC. The IASB is responsible for IFRS (international accounting reporting standards) and the IFRIC (international financial reporting interpretations committee) is responsible for issuing interpretations of the standards.

Question 352

Q851. Who is rules based, who is principle based?

Answer 352

A851. US GAAP is more rules based approach (example would be capital lease vs operating lease, follow the OWNS rules based approach). IFRS this is principle based.

Question 353

Q852. What is IASB framework ?

Answer 353

A852. The IASB Framework is very similar to FASB SFAC. The IASB framework are the rules to make rules. The IASB framework is not considered an accounting standard, and therefore does not override any accounting treatment required by the international accounting standards or the IFRS.

Question 354

Q853. Qualitative characteristics under IASB

Answer 354

A853. 1) Understandability 2) Relevance 3) Reliability 4) Comparability

Question 355

Q854. Relevance under IASB?

Answer 355

A854. 1) Predictive Value 2) Confirmatory Value 3) Materiality

Question 356

Q855. Reliability under IASB?

Answer 356

A855. 1) Faithful representation 2) Substance over form 3) Neutrality 4) Prudence 5) Completeness

Question 357

Q856. Constraints under IASB?

Answer 357

A856. 1) Timeliness 2) Benefits > Cost 3) Balance between qualitative characteristics.

Question 358

Q857. FASB SFAC # 6, this contains ten elements of financial statements, what are they ?

Answer 358

A857. Assets, liabilities, equity, investments by owners, distribution by owners, comprehensive income, revenues, expenses, gains and losses.

Question 359

Q858. The ISAB frame work contains only five elements, what are they ?

Answer 359

A858. Asset, liability, Equity, Income and Expenses.

Question 360

Q859. Income under IASB framework ?

Answer 360

A859. An important point to understand is that the definition of income includes both revenues and gains. Revenues arise in the normal course of business and are often referred to as sales, fees, interest, dividends royalties and rent. The IASB framework indicates that gains are increases in economic benefits and are no different in nature from revenues. Hence they are not regarded as separate elements in the framework. The frame work treats losses in the same way, as no different in nature from other expenses. However, the framework also indicates that when gains or losses are reported on the income statement, they are usually displayed separately because this knowledge may be useful to the decision maker. Gains may be reported net of related expenses and losses may be reported net of their related income.

Question 361

Q860. IFRS Revenue recognitions from the sale of goods ?

Answer 361

A860. 1) Significant risks and rewards of ownership of the goods are transferred to the buyer. 2) The entity does not retain either a continuing managerial involvement or control over the goods. 3) The amount of revenue can be measured reliably. 4) It is probable that economic benefits will flow to the entity from the transaction. 5) The cost incurred can be measured reliably.

Question 362

Q861. IFRS Revenue recognitions from the sale of services ?

Answer 362

A861. 1) The amount of revenue can be measured reliably. 2) It is probable that economic benefits will flow to the entity 3) The stage of completion at the end of the reporting period can be measured reliably 4) The cost incurred and the costs to complete the transactions can be measured reliably.

Question 363

Q862. Cost recovery method and installment sales methods regarding IFRS?

Answer 363

A862. If the outcomes cannot be measured reliably then revenue should be recognized using the cost recovery method. Please note that IFRS does not allow the use of completed contract method.

Question 364

Q863. Unearned Revenue:

Answer 364

A863. Debit cash Credit unearned revenue When revenue is then earned you then: Debit unearned revenue and then Credit Earned revenue.

Question 365

Q864. Prepaid Expense:

Answer 365

A864. Debit Prepaid expense Credit cash As prepaid expense expires: Debit Expense Credit Prepaid Expense

Question 366

Q865. Installment Sales method:

Answer 366

A865. Step 1) Sales – COGS = Gross profit. Step 2) And gross profit / net sale = gross profit %. Step 3) cash collection X gross profit % = Realized G.P Step 4) Accounts receivable x gross profit % = Deferred gross profit.

Question 367

Q866. Cost recovery method

Answer 367

A866. Do not recognize any profit till you recover your cost. Also the interest in the cost recover method is added to the initial down payment and the annual installment payments, it’s not treated separately, like in the installment sales method.

Question 368

Q867. Gain or loss contingencies

Answer 368

A867. the GAAP rule for both items is conservatism

Question 369

Q868. Royalties received and unearned royalties, 2 year statements. Tips:

Answer 369

A868. Royalties’ receivable and unearned royalties problems, if 2 year statements are given, compare statements and make a journal entry of the debit or credit.

Question 370

Q869. AP and purchases Tips:

Answer 370

A869. Accounts payable and purchases are on the same side of the credit column. Payments are on the debit side. Beginning and ending AP and purchases are on the credit side.

Question 371

Q870. Installment Sales tips

Answer 371

A870. For the installment sales method to figure out sales for the year, take the deferred gross profit and divide it by the gross profit percentage. For installment sales method to figure out cash collection . Take the GP realized / GP % = cash collection. Remember this is merely the formula for cash collection X GP % = GP realized and worded around.

Question 372

Q871. The SEC has been empowered by Congress to establish

Answer 372

A871. principles for financial reporting by issuers in the US. The SEC has delegated this authority to the FASB.

Question 373

Q872. The SEC enforces the

Answer 373

A872. accounting principles by ensuring that issuers meet certain periodic reporting requirements

Question 374

Q873. The SEC’s Division of Enforcement

Answer 374

A873. investigates possible violations of securities laws and prosecutes them in federal court

Question 375

Q874. The Financial Accounting Foundation oversees two other bodies

Answer 375

A874. the FASB and the Financial Accounting Standards Advisory Council (FASAC)

Question 376

Q875. The FASBs due process before issuing final pronouncements

Answer 376

A875. 1. Discuss issues and consider input from interested parties 2. Vote on a final draft proposal 3. If majority of seven board members approve, an Accounting Standards Update is issued

Question 377

Q876. The IASB issues authoritative pronouncements in the form of

Answer 377

A876. International Financial Reporting Standards (IFRSs)

Question 378

Q877. IFRSs are

Answer 378

A877. principles based

Question 379

Q878. US GAAP are

Answer 379

A878. rules based. The FASB is considering a more principles- based approach

Question 380

Q879. GASB is the primary standard setter for

Answer 380

A879. state and local government

Question 381

Q880. Accounting principles for the federal government are issued by

Answer 381

A880. the Federal Accounting Standards Advisory Board (FASAB)

Question 382

Q881. Financial reporting should provide information that is

Answer 382

A881. useful in making business and economic decisions

Question 383

Q882. Characteristics and limitations that are inherent in financial reporting

Answer 383

A882. 1. The information must be quantifiable in units of money 2. The information pertains to individual business entities, not industries or an economy as a whole or individual consumers 3. The information often results from approximate measures 4. The information largely reflects transactions and events that have already happened 5. Financial reporting is but one source of information 6. The benefits of information should be expected to at least equal its cost

Question 384

Q883. Distinguishing characteristics of Not-for-Profit entities

Answer 384

A883. 1. They receive significant resources from providers who do not expect to receive repayment or proportionate economic benefits 2. They have operating purposes other than to provide goods or services at a profit 3. They lack defined ownership interests that can be sold transferred or redeemed; or entitle an owner to distributions upon liquidation of the entity

Question 385

Q884. The FASB identified four key stakeholder groups that are interested in financial reporting by non business entities

Answer 385

A884. 1. Resource providers 2. Constituents 3. Governing and oversight bodies 4. Managers

Question 386

Q885. Three characteristics of the governmental environment distinguish it from the business and not-for-profit environments

Answer 386

A885. 1. The representative form of government and the separation of powers 2. The federal system of government with its hierarchy of national, state, county, and city governments, along with the significant flow of revenues among them 3. The expectations of taxpayers who provide government with revenue, about the services they receive

Question 387

Q886. The structure of government has two inherent control characteristics

Answer 387

A886. 1. The budget as the embodiment of policy decisions and a legally binding control tool 2. The use of fund accounting

Question 388

Q887. Users of financial reporting for governmental type activities

Answer 388

A887. 1. Citizens 2. Legislative and oversight bodies 3. Investors and creditors

Question 389

Q888. The uses of governmental reporting are

Answer 389

A888. 1. Comparing actual results with budgeted amounts 2. Assessing financial condition and operating results 3. Determining compliance with laws, rules, and regulations 4. Evaluating efficiency and effectiveness

Question 390

Q889. Accountability requires that a government justify

Answer 390

A889. how its spends the resources it collects in pursuit of the goals citizens have set for it.

Question 391

Q890. Interperiod equity implies that

Answer 391

A890. current citizens should treat future citizens with respect.

Question 392

Q891. Unless stated otherwise, every business is assumed to be

Answer 392

A891. a going concern that will continue operating indefinitely

Question 393

Q892. Monetary-Unit Assumption - accounting records are kept in

Answer 393

A892. terms of money

Question 394

Q893. Periodicity Assumption- Economic activity can be divided into

Answer 394

A893. distinct time periods

Question 395

Q894. Historical cost principle - transactions are recorded initially at cost because

Answer 395

A894. that is the most objective determination of fair value

Question 396

Q895. Full Disclosure Principle - Financial statement users should be able to assume that financial information that could

Answer 396

A895. influence users’ judgment is reported in financial statements

Question 397

Q896. Industry Practice Constraint - Occasionally, GAAP are not followed in an industry because

Answer 397

A896. adherence to them would generate misleading or unnecessary information

Question 398

Q897. Conservatism Constraint - The conservatism doctrine originally directed accountants, when faced with two or more acceptable choices,

Answer 398

A897. to report the lowest amount for an asset or income i.e. lower of cost or market for inventories

Question 399

Q898. Understandability is the quality that allows

Answer 399

A898. a user to perceive the information’s significance

Question 400

Q899. Decision usefulness - users must decide for themselves what information is

Answer 400

A899. useful for their particular decisions

Question 401

Q900. Relevance is

Answer 401

A900. the capacity of information to make a difference in a decision

Question 402

Q901. Reliability gives users confidence that

Answer 402

A901. information is reasonably free from error and bias and that it faithfully represents what it purports to represent

Question 403

Q902. Comparability - comparable information enables users to

Answer 403

A902. observe similarities in and differences between economic events

Question 404

Q903. Consistency is

Answer 404

A903. conformity over time with the same policies and procedures

Question 405

Q904. Assets are

Answer 405

A904. probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

Question 406

Q905. Liabilities are

Answer 406

A905. probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

Question 407

Q906. Equity or Net Assets is

Answer 407

A906. the residual interest in the assets of an entity after subtracting liabilities

Question 408

Q907. Investments by owners are

Answer 408

A907. increases in equity of a business entity

Question 409

Q908. Distributions to Owners are

Answer 409

A908. decreases in equity

Question 410

Q909. Comprehensive income is

Answer 410

A909. the periodic change in equity of a business entity from nonowner sources

Question 411

Q910. Revenues are

Answer 411

A910. inflows of assets or settlements of liabilities from delivering or producing goods, providing services, or other activities that qualify as ongoing major or central operations

Question 412

Q911. Expenses are

Answer 412

A911. outflows of assets or incurrence of liabilities from delivering or producing goods, providing services, or other activities that qualify as ongoing major or central operations

Question 413

Q912. Gains are

Answer 413

A912. increases in equity except from revenues or investments by owners

Question 414

Q913. Losses are

Answer 414

A913. decreases in equity except from expenses or distributions to owners

Question 415

Q914. IFRS Difference The elements of financial statements are

Answer 415

A914. assets, liabilities, equity, income, and expenses

Question 416

Q915. Changes in assets and liabilities with no change in equity

Answer 416

A915. 1. Asset exchanges 2. Liability exchanges 3. Receipt of goods or services with incurrence of payables 4. Settlement of payables with assets

Question 417

Q916. Changes in assets and liabilities with change in equity

Answer 417

A916. 1. Comprehensive income - revenues, expenses, gains, losses 2. Transfers between entity and owners - investments by owners, distributions to owners

Question 418

Q917. Changes in equity with no changes in assets or liabilities

Answer 418

A917. 1. Declaration and distribution of stock dividends 2. Conversion of preferred stock

Question 419

Q918. Accrual accounting involves

Answer 419

A918. recording the financial effects of transactions and other events and circumstances when they occur rather than when their direct cash consequences occur

Question 420

Q919. Accruals anticipate

Answer 420

A919. future cash flows

Question 421

Q920. Deferrals reflect

Answer 421

A920. past cash flows i.e. prepaid insurance

Question 422

Q921. Systematic and rational allocation is

Answer 422

A921. the assignment or distribution of an amount according to a plan or formula

Question 423

Q922. Amortization is a form of allocation. It decreases

Answer 423

A922. an amount by periodic payments or write-downs

Question 424

Q923. Recognition is the formal

Answer 424

A923. incorporation of an item in the financial statements

Question 425

Q924. Realization is

Answer 425

A924. the conversion of noncash resources into money.

Question 426

Q925. Financial statements are

Answer 426

A925. the primary means of communicating financial information to external parties - includes notes, supplementary information, and other disclosures

Question 427

Q926. A full set of financial statements should show the following

Answer 427

A926. 1. Financial position at the end of the period 2. Earnings for the period 3. Comprehensive income for the period 4. Cash flows during the period 5. Investments by and distributions to owners during the period

Question 428

Q927. Recognition criteria determine whether and when items should be

Answer 428

A927. incorporated into the financial statements, either initially or as changes in existing items

Question 429

Q928. Four fundamental recognition criteria apply to all recognition issues

Answer 429

A928. 1. The item must meet the definition of an element of financial statements 2. It must have a relevant attribute measurable with sufficient reliability 3. The information about it must be relevant 4. The information must be reliable Subject to cost/benefit constraint and materiality

Question 430

Q929. According to the revenue recognition principle, revenues and gains should be recognized when

Answer 430

A929. 1. Realized or realizable 2. Earned

Question 431

Q930. Revenues and gains are realized when

Answer 431

A930. goods or services have been exchanged for cash or claims to cash

Question 432

Q931. Revenues are earned when the earning process

Answer 432

A931. has been substantially completed, and the entity is entitled to the resulting benefits or revenues

Question 433

Q932. Expenses and losses are recognized when

Answer 433

A932. a consumption of economic benefits occurs during the entity’s primary activities, or an impairment of the ability of existing assets to provide future benefits has occurred

Question 434

Q933. Current (replacement) cost is

Answer 434

A933. the amount of cash that would have to be paid for a current acquisition of the same or an equivalent asset

Question 435

Q934. Current market value (exit value) is

Answer 435

A934. the cash or equivalent realizable by selling an asset in an orderly liquidation (not a forced sale)

Question 436

Q935. Net realizable value is

Answer 436

A935. the cash or equivalent expected to be received for an asset in the due course of business, minus the costs of completion and sale

Question 437

Q936. FASB Conceptual Framework - Recognition and measurement concepts

Answer 437

A936. Financial statements Revenue recognition Expense recognition Measurement attributes

Question 438

Q937. FASB Conceptual Framework - Assumptions

Answer 438

A937. Economic Entity Going Concern Monetary Unit Periodicity

Question 439

Q938. FASB Conceptual Framework - Principles

Answer 439

A938. Historical Cost Revenue Recognition Matching Full Disclosure

Question 440

Q939. FASB Conceptual Framework - Constraints

Answer 440

A939. Cost-Benefit Materiality Industry Practice Conservatism

Question 441

Q940. Regulation S-X

Answer 441

A940. governs the reporting of financial statements, including notes and schedules

Question 442

Q941. Regulation S-K

Answer 442

A941. provides disclosure standards, including many of a nonfinancial nature, also covers certain aspects of corporate annual reports to shareholders

Question 443

Q942. Regulation S-B

Answer 443

A942. applies to small business issuers - reduces disclosure requirements for a small business when it files a registration statement under the 1933 act or reports under the 1934 act

Question 444

Q943. Financial Reporting Releases

Answer 444

A943. announce accounting and auditing matters of general interest

Question 445

Q944. Staff Accounting Bulletins

Answer 445

A944. are issued as interpretations to be followed by the SEC staff in administering disclosure requirements

Question 446

Q945. Form 10-K is

Answer 446

A945. the annual report to the SEC. Must be filed within 60 days of the last day of the fiscal year for large accelerated filers, 75 days for accelerated filers, and 90 days for nonaccelerated filers

Question 447

Q946. Form 10-Q is

Answer 447

A946. the quarterly report to the SEC. Must be filed in 40 days for larger and accelerated filers, and 45 days for nonaccelerated filers

Question 448

Q947. Form 8-K is

Answer 448

A947. a current report to disclose material events

Question 449

Q948. Material events to be reported on Form 8-K

Answer 449

A948. 1. Change in control 2. Acquisition or disposition of a significant amount of assets not in the ordinary course of business 3. Bankruptcy or receivership 4. Resignation of directors 5. A change in the registrant’s certifying accountant

Question 450

Q949. Current assets consist of

Answer 450

A949. cash and other assets or resources commonly identified as reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business

Question 451

Q950. The operating cycle is the

Answer 451

A950. average time between the acquisition of resources and the final receipt of cash from their sale as the culmination of revenue generating activities. If <1 year, then 1 year is the period used for segregating current from noncurrent assets

Question 452

Q951. Current assets include

Answer 452

A951. 1. Cash and cash equivalents 2. Receivables 3. Inventories 4. Certain individual trading, available-for-sale, and held-to- maturity securities 5. Prepaid expenses

Question 453

Q952. Noncurrent assets are those

Answer 453

A952. not qualifying as current assets

Question 454

Q953. Investments and funds include nonoperating items

Answer 454

A953. intended to be held the longer of 1 year or the operating cycle

Question 455

Q954. Property, plant, and equipment are

Answer 455

A954. tangible operating items recorded at cost and reported net of accumulated depreciation

Question 456

Q955. Intangible assets are

Answer 456

A955. nonfinancial assets without physical substance, i.e. goodwill and patents

Question 457

Q956. Other noncurrent assets include noncurrent assets not readily classifiable elsewhere such as

Answer 457

A956. 1. Bond issue costs 2. Machinery rearrangement costs 3. Long-term prepayments 4. Deferred tax assets arising from interperiod tax allocation 5. Long-term receivables from unusual transactions, i.e. loans to officers

Question 458

Q957. Current liabilities are

Answer 458

A957. obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets, or the creation of other current liabilities

Question 459

Q958. Trade payables for

Answer 459

A958. items entering into the operating cycle, i.e. materials and supplies

Question 460

Q959. Other payables arising from operations, such as

Answer 460

A959. accrued wages, salaries, rentals, royalties, and taxes

Question 461

Q960. Unearned revenues arising from

Answer 461

A960. collections in advance of delivering goods or performing services

Question 462

Q961. Current liabilities do not include

Answer 462

A961. 1. short term obligations if the entity intends to refinance them on a long-term basis and demonstrates an ability to consummate such refinancing 2. Dividends not yet declared 3. Debts to be paid from funds accumulated in noncurrent assets

Question 463

Q962. Working capital =

Answer 463

A962. Current Assets - Current Liabilities

Question 464

Q963. Noncurrent liabilities are those not qualifying as current. The noncurrent portions of the following items are reported in this section of the balance sheet

Answer 464

A963. 1. Noncurrent notes and bonds 2. Liabilities under capital lease 3. Most postretirement benefit obligations 4. Deferred tax liabilities arising from interperiod tax allocation 5. Obligations under product or service warranty agreements 6. Advances for noncurrent commitments to provide goods and services 7. Advances from affiliated entities 8. Deferred revenue

Question 465

Q964. Equity (or net assets for a NFP) is

Answer 465

A964. the residual after total liabilities are subtracted from total assets

Question 466

Q965. Equity consists of

Answer 466

A965. 1. Capital contributed by owners 2. Retained earnings (income reinvested) 3. Accumulated other comprehensive income (all comprehensive income items not included in net income) 4. The noncontrolling interest in a consolidated entity

Question 467

Q966. Treasury stock recorded at cost is

Answer 467

A966. a reduction of total equity

Question 468

Q967. Treasury stock recorded at par

Answer 468

A967. is a direct reduction of the pertinent contributed capital balance, i.e. common stock or preferred stock

Question 469

Q968. The results of operations are reported in

Answer 469

A968. the income statement on the accrual basis using an approach oriented to historical transactions

Question 470

Q969. The traditional income statement records

Answer 470

A969. revenues from and expenses of the entity’s major activities and gains and losses from other activities

Question 471

Q970. Net income or loss =

Answer 471

A970. Revenues - expenses + gains - losses

Question 472

Q971. income or loss is closed to

Answer 472

A971. retained earnings at the end of the period

Question 473

Q972. Under the all-inclusive approach to net income

Answer 473

A972. all transactions affecting the net change in equity during the period are included with certain exceptions Transactions not included are transactions with owners, prior period adjustments, items reported initially in other comprehensive income, transfers to and from appropriated retained earnings, adjustments made in quasi reorganization, and effects on prior periods of accounting changes

Question 474

Q973. The single step income statement provides

Answer 474

A973. one grouping for revenues and gains and one for expenses and losses. The single step is the one subtraction necessary to arrive at net income

Question 475

Q974. The multiple step income statement matches

Answer 475

A974. operating revenues and expenses in a separate section from nonoperating items. It enhances disclosure by presenting subtotals

Question 476

Q975. The condensed income statement includes

Answer 476

A975. only the section totals of the multiple step format

Question 477

Q976. Cost of goods sold =

Answer 477

A976. Beginning FG inventory + purchases or cost of goods manufactured = (Goods available for sale) - Ending FG inventory

Question 478

Q977. Cost of goods manufactured =

Answer 478

A977. Beginning WIP + Sum of periodic manufacturing costs - Ending WIP or Ending FG Inventory + COGS - Beginning FG Inventory

Question 479

Q978. Interest expense is recognized based on

Answer 479

A978. the passage of time. In the case of bonds, notes, and capital leases, the effective interest method is used

Question 480

Q979. When an entity reports a discontinued operation or an extraordinary item

Answer 480

A979. it must be presented in a separate section after income from continuing operations 1. Intraperiod tax allocation is required - tax expense or benefit is allocated to continuing operations, discontinued operations, extraordinary items, OCI, items debited or credited direct to other components of equity

Question 481

Q980. The following items are reported separately in the discontinued operations section of the income statement

Answer 481

A980. 1. Income or loss from operations of the component unit (including gain or loss on disposal) 2. Income tax expense or benefit

Question 482

Q981. In IFRS, no items are classified as

Answer 482

A981. extraordinary on the IS or in the notes

Question 483

Q982. Appropriate earnings per share must be disclosed

Answer 483

A982. on the face of the income statement or in the notes

Question 484

Q983. IFRS difference - expenses may be classified by

Answer 484

A983. the nature-of-expense method or the function-of-expense method

Question 485

Q984. The statement of retained earnings displays

Answer 485

A984. 1. Beginning balance of retained earnings 2. Prior period adjustments (net of tax) 3. Adjusted beginning balance 4. Net income (loss) 5. Dividends paid or declared 6. Certain other rare items (quasi-reorganizations) 7. Ending balance of retained earnings

Question 486

Q985. Comprehensive income includes

Answer 486

A985. all changes in equity during a period except those resulting from investments by owners and distributions to owners

Question 487

Q986. Other comprehensive income includes

Answer 487

A986. all items of comprehensive income not included in net income

Question 488

Q987. Cash flow statement - Investing activities include

Answer 488

A987. 1. Making and collecting loans 2. Acquiring and disposing of debt or equity instruments 3. Acquiring and disposing of property, plant and equipment and other productive assets held for or used in the production of goods and services

Question 489

Q988. Cash flow statement - Investing activities exclude

Answer 489

A988. transactions in cash equivalents and certain loans or other debt or equity instruments acquired for resale

Question 490

Q989. Cash flow statement - Financing activities include

Answer 490

A989. 1. Issuance of stock 2. Payment of dividends 3. Treasury stock transactions 4. Incurrence of debt 5. Repayment or other settlement of debt obligations 6. The exercise of share options resulting in excess tax benefits

Question 491

Q990. Information about all investing or financing activities that affect recognized assets or liabilities but not cash flows must be

Answer 491

A990. disclosed outside the body of the statement

Question 492

Q991. The direct method of cash flow statement

Answer 492

A991. converts the accrual-basis amounts in the income statement to the cash basis

Question 493

Q992. Using the direct method, an entity must report, at a minimum

Answer 493

A992. 1. Cash collected from customers 2. Interest and dividends received 3. Other operating cash receipts 4. Cash paid to employees and other suppliers of goods and services 5. Interest paid 6. Income taxes paid and the separately reported amount that would have been paid if excess tax benefits from share based payment arrangements had not been available 7. Other operating cash payments

Question 494

Q993. The indirect method of cash flow statement

Answer 494

A993. reconciles net income of a business or the change in net assets of a NFP entity to net operating cash flow

Question 495

Q994. Consolidated financial statements are used when

Answer 495

A994. one entity holds a controlling financial interest in one or more others. They are required by GAAP

Question 496

Q995. Combined financial statements are used to

Answer 496

A995. combine the statements of the subsidiaries without consolidating them with those of the parent. Are not an allowable substitute for consolidated statements

Question 497

Q996. Examples of OCBOAs are

Answer 497

A996. 1. A basis for tax purposes 2. A basis used to comply with the requirements of a regulator 3. The cash basis and modifications of the cash basis having substantial support 4. A definite set of criteria having substantial support

Question 498

Q997. Cash basis - under the strict basis of accounting,

Answer 498

A997. revenues and expenses are recognized when cash is received or paid regardless of when goods are received or services are rendered

Question 499

Q998. Modified Cash Basis - The modified cash basis uses the cash basis for typical operating activities but

Answer 499

A998. capitalizes items such as inventory and plant assets

Question 500

Q999. Income Tax Basis - Financial statements prepared under GAAP

Answer 500

A999. are not usable for calculating income tax liability