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FAR Flashcards

1
Q

What is the primary objective of accounting?

A

to measure income

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2
Q

What does income measure?

A

a firms efficiency

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3
Q

What are the basis of all economic activity?

A

monetary units

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4
Q

What are the most authoritative accounting pronouncements?

A

FASB Codification

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5
Q

What are the two levels of GAAP?

A

Authoritative and non-authoritative

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6
Q

What are the differences between managerial and financial accounting?

A

Managerial has a more timeliness focus and does not follow GAAP

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7
Q

What are financial reports used for?

A

Providing useful information to users (existing and potential investors and creditors)

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8
Q

What reports must be filed with the SEC?

A

10k- annually and audited, 10Q- quarterly and reviewed

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9
Q

What are the primary constraints of financial reporting?

A

Cost v benefit and materiality

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10
Q

What are the secondary constraints of financial reporting?

A

Consistency (the ability to compare year over year) and comparability (the ability to compare company v company)

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11
Q

What are the qualitative characteristics of financial reporting?

A

Relevance and faithful representation

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12
Q

In order to be relevant, information must have:

A 
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
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13
Q

In order for information to be faithfully represented it must be:

A

Complete. Nothing is omitted that would impact the decision making of the user.
Neutral- free from bias
Freedom from error

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14
Q

What are the enhancing qualitative characteristics of financial reporting?

A

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

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15
Q

What is an accrual?

A

Revenue has been earned or an expense has been incurred with no cash outlay yet

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16
Q

What is a deferral?

A

A cash receipt or outlay that has been received but yet earned or incurred.

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17
Q

What is recognition?

A

When an item is recorded and included in the financial statements.

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18
Q

Rule of conservatism

A

When there is uncertainty, conservatism requires you to chose the best option that will not overstate the financial position of the company

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19
Q

Fair value

A

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.

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20
Q

What are the market assumptions for fair value?

A

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-

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21
Q

What is the fair value hierarchy?

A

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

22
Q

What are the three acceptable valuation techniques?

A

1- market approach- market transactions/prices value the asset
2- income approach- present value discounts earnings
3- Cost approach- replacement cost determines value

23
Q

When is revenue recognized?

A

When earned

24
Q

What is the difference between a gain and revenue?

A

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.

25
Q

What is a loss?

A

A decrease in equity not due to the central activities of a business. Can be operating or non.

26
Q

What is the operating cycle?

A

The average time it takes to turn services/materials into cash

27
Q

5 asset measurement and valuation methods

A

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

28
Q

Net realizable value

A

Sales price of an asset- selling disposal fee

29
Q

Entrance cost

A

Replacement cost- cost to reacquire an asset

30
Q

Exit cost

A

Market cost- sales price of an asset

31
Q

When are installment sales used?

A

When cash collection is uncertain

32
Q

When is revenue recognized in installment sales?

A

When cash is received

33
Q

What is the cost recovery method?

A

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.

34
Q

When does the franchisee recognize franchise costs?

A

Franchise costs are deferred until corresponding revenue begins

35
Q

When does franchiser recognize franchise revenue?

A

When the franchiser delivers and the franchisee begins recognizing revenue.

36
Q

How to convert revenue from cash to accrual basis

A 
SPEAR- BAR
Sales (Payments)
\+ Ending AR
-Beginning AR
= Sales revenue on an accrual basis
37
Q

How to convert COGS from cash to accrual basis?

A 
CRAP-I
Cash remitted (paid)
\+increase in AP
-increase in inventory
= COGS on accrual basis
38
Q

How are discontinued ops reported?

A

net of tax, after continuing operations but before extraordinary items

39
Q

What are extraordinary items and how are they reported

A

items that are unusual AND infrequent, reported net of tax after discontinued ops

40
Q

How are items unusual or infrequent in nature reported?

A

As part of continuing ops both gross and net of tax

41
Q

When are expenses recognized?

A

When incurred, accrue if not yet paid

42
Q

Product costs

A

product expenses matched with corresponding revenue

43
Q

Period costs

A

amortized and recognized with the passage of time

44
Q

How are impaired assets reported?

A

They are written down and expensed immediately if the impairment is felt to be permanent

45
Q

How are start up costs reported?

A

They are expensed as incurred

46
Q

When can you capitalize interest?

A

When the interest is for an internal project

47
Q

What is comprehensive income?

A

Net income + OCI

48
Q

What is OCI?

A

Other comprehensive income- non-owner changes to equity (investments by or dividends paid to owners do not count)

49
Q

What is regulation S-K?

A

Under securities act of 1933 for issuers issuing an IPO.

50
Q

What items are included in accounting policies disclosure?

A 
Accounting principles used
Basis of consolidation
Inventory pricing methods
Depreciation methods
Amortization of intangibles
51
Q

What are some items included in the risks and uncertainties disclosure?

A

Nature of operations
Significant estimates and assumptions
Concentration vulnerabilities

FAR (19 decks)

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