FAR Flashcards
What is the primary objective of accounting?
to measure income
What does income measure?
a firms efficiency
What are the basis of all economic activity?
monetary units
What are the most authoritative accounting pronouncements?
FASB Codification
What are the two levels of GAAP?
Authoritative and non-authoritative
What are the differences between managerial and financial accounting?
Managerial has a more timeliness focus and does not follow GAAP
What are financial reports used for?
Providing useful information to users (existing and potential investors and creditors)
What reports must be filed with the SEC?
10k- annually and audited, 10Q- quarterly and reviewed
What are the primary constraints of financial reporting?
Cost v benefit and materiality
What are the secondary constraints of financial reporting?
Consistency (the ability to compare year over year) and comparability (the ability to compare company v company)
What are the qualitative characteristics of financial reporting?
Relevance and faithful representation
In order to be relevant, information must have:
Makes a difference to the user. PCM - Passing confirms money Predictive value- predicts the future trends Confirmed value- past predictions Materiality- could affect user decisions
In order for information to be faithfully represented it must be:
Complete. Nothing is omitted that would impact the decision making of the user.
Neutral- free from bias
Freedom from error
What are the enhancing qualitative characteristics of financial reporting?
Comparability- allows users to compare time periods
Verifiability- different users would likely reach the same conclusions with the same information
Timeliness- the information reaches the user in time to make a decision
Understandability
What is an accrual?
Revenue has been earned or an expense has been incurred with no cash outlay yet
What is a deferral?
A cash receipt or outlay that has been received but yet earned or incurred.
What is recognition?
When an item is recorded and included in the financial statements.
Rule of conservatism
When there is uncertainty, conservatism requires you to chose the best option that will not overstate the financial position of the company
Fair value
the price you would receive if you sold an asset. Fair value assumes the asset is at it’s highest and best value that it will be.
What are the market assumptions for fair value?
1- the asset is sold in the most advantageous market to get the best price possible
2- the buyer and seller are not related
3- buyer and seller are knowledgeable
4- the buyer and seller are able and motivated to transact- the buyer actually wants to buy and has the means, the seller actually wants to sell
5-
What is the fair value hierarchy?
Level 1- Top level- uses price quotes or market prices (eg. NASDAQ/NYSE)
Level 2- Mid level- eg. Interest rates
Level 3- Lowest- unobservable, uses forecasts and assumptions
What are the three acceptable valuation techniques?
1- market approach- market transactions/prices value the asset
2- income approach- present value discounts earnings
3- Cost approach- replacement cost determines value
When is revenue recognized?
When earned
What is the difference between a gain and revenue?
A gain is an increase in equity that is not due to the central activities of a company. A gain can be operating or non-operating.
What is a loss?
A decrease in equity not due to the central activities of a business. Can be operating or non.
What is the operating cycle?
The average time it takes to turn services/materials into cash
5 asset measurement and valuation methods
1- PV of future cash flows
2- Historical cost- asset cost-depreciation/amortization
3- Replacement cost- entrance cost- cost to reacquire and asset
4- Market cost- exit cost- sales price of an asset
5- Net realizable value- sales price of an asset- selling/disposal fee
Net realizable value
Sales price of an asset- selling disposal fee
Entrance cost
Replacement cost- cost to reacquire an asset
Exit cost
Market cost- sales price of an asset
When are installment sales used?
When cash collection is uncertain
When is revenue recognized in installment sales?
When cash is received
What is the cost recovery method?
Most conservative approach when collection of a sales price is uncertain. No revenue is recognized until all costs from the purchase of the asset has been recouped.
When does the franchisee recognize franchise costs?
Franchise costs are deferred until corresponding revenue begins
When does franchiser recognize franchise revenue?
When the franchiser delivers and the franchisee begins recognizing revenue.
How to convert revenue from cash to accrual basis
SPEAR- BAR Sales (Payments) \+ Ending AR -Beginning AR = Sales revenue on an accrual basis
How to convert COGS from cash to accrual basis?
CRAP-I Cash remitted (paid) \+increase in AP -increase in inventory = COGS on accrual basis
How are discontinued ops reported?
net of tax, after continuing operations but before extraordinary items
What are extraordinary items and how are they reported
items that are unusual AND infrequent, reported net of tax after discontinued ops
How are items unusual or infrequent in nature reported?
As part of continuing ops both gross and net of tax
When are expenses recognized?
When incurred, accrue if not yet paid
Product costs
product expenses matched with corresponding revenue
Period costs
amortized and recognized with the passage of time
How are impaired assets reported?
They are written down and expensed immediately if the impairment is felt to be permanent
How are start up costs reported?
They are expensed as incurred
When can you capitalize interest?
When the interest is for an internal project
What is comprehensive income?
Net income + OCI
What is OCI?
Other comprehensive income- non-owner changes to equity (investments by or dividends paid to owners do not count)
What is regulation S-K?
Under securities act of 1933 for issuers issuing an IPO.
What items are included in accounting policies disclosure?
Accounting principles used Basis of consolidation Inventory pricing methods Depreciation methods Amortization of intangibles
What are some items included in the risks and uncertainties disclosure?
Nature of operations
Significant estimates and assumptions
Concentration vulnerabilities
