FAR 2

Question 1

What are the appropriate methods for recognizing expenses

Answer 1

-Cause and effect
Example: charging inventory to cost of goods sold.

• Systematic and Rational Allocation - Example: depreciation of property and equipment
• Immediate recognition - recognizing salaries expense as it is incurred

Question 2

How do you recognize deferred costs

Answer 2

• They can be recognized under the cause and effect approach
• They can also be recognized under the Systematically and Rationally allocated

Question 3

A decrease in an asset from primary operations results in what?

Answer 3

an expense

Question 4

An increase or decrease in assets or liabilities from incidental transaction result in what?

Answer 4

Gains or losses

Question 5

An increase in an asset from primary operations will result in?

Answer 5

Revenue

Question 6

A decrease in a liability from primary operations will result in?

Answer 6

Revenue

Question 7

Who is FASB established By

Answer 7

The Financial Accounting Foundation

• They have oversight responsibilities over FASB

Question 8

What is the FASB Process for establishing accounting standards:

Answer 8

• They use a process in which potential standards are issued in exposure draft form
• Feedback is solicited by a variety of means - including public forums

Question 9

What is the Emerging Issues Taskforce

Answer 9

A group that is established by FASB that deliberate on matters and make proposals to the FASB

• The FASB ratifies and incorporates these into the Accounting Standards Codification

Question 10

who is responsible for IASB

Answer 10

IFRS

Question 11

What is AOCI and where is it reported

Answer 11

AOCI - is the cumulative amounts reported in comprehensive income that is reduced by reclassifications

• It is a component of stockholders equity and is reported in the Statement of financial position

Question 12

How does FASB amend the Accounting Standards Codification

Answer 12

They issue Accounting Standards Updates

Question 13

What are the areas of required disclosures for any risks and uncertainties?

Answer 13

• Nature of operations
• Use of estimates
• Certain significant estimates
• Vulnerability associated with certain concentrations

(Example - if you had a concentration of your revenues by two customers - you must indicate that this is the case) - no need to include their names or financial conditions

Question 14

What are the two fundamental Qualitative characteristics of useful financial information

Answer 14

Relevance and Faithful Representation

Question 15

What is the monetary unit assumption

Answer 15

This recognizes that in order to be useful - financial information should be described in both qualitative and qualitative terms.

Under the monetary assumption - events and transactions are quantitatively measured in terms of the equivalent amount of money they represent.

Or the equivalent amount of money that has been exchanged

Question 16

What are three means of measuring an element of financial reporting in monetary terms

Answer 16

• Historical cost
• Replacement cost
• Fair market value

Question 17

Reporting Inventory at Lower of Cost or Market:

Answer 17

• It is considered a departure from historical costs since the amount on the balance sheet may be lower than the historical cost
• If LCM is applied each period - there is no violation of the consistency principle
• LCM is using conservatism principle
• Footnotes must indicate that LCM is being used - if not then the concept of full-disclosure is being violated

Question 18

How do you use the matching concept to to estimate uncollectible account balances

Answer 18

Under matching concept - expenses are recognized in the same period that the entity recognizes revenues.

Uncollectible account expenses would be recognized in the same period as the revenue Example: using the ratio of actual losses from uncollectible accounts to past net credit sales

Question 19

How do you recognize Capital on a cash basis -

Answer 19

Take initial capital ($350K) which is the amount paid of rtes business.

This is increased by the amount which revenues exceed expenses ($60k)

This is then reduced by the amount the drawn by the owner ($20k)

$390K = ending balance for Capialt

Question 20

How is revenue recognized - when the buyer has the right of return

Answer 20

When the buyer has the right of return - the transaction is considered:

A Sale with a right of return

In the case of a regular sale when you can REASONABLY estimate returns - revenue from the sale will be recognized and an allowance for returns is established

In the case where returns CANNOT be reasonably estimated - then revenue is NOT recognized until the right of the return expires

So - even if goods are shipped, and the buyer accepts the good, the revenue is not recognized until the right of returns expires