FAR Flashcards
When common stock and preferred stock are issued in a lump sump purchase, how is APIC allocated?
APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.
When is APIC recorded on a stock subscription?
APIC increases on date subscription is recorded – not on the date paid for or issued
How are changes in accounting principle applied?
Retrospective Application: -Prior Periods adjusted -Retained Earnings adjusted -Completed Contract to % Completion Ex: LIFO to FIFO
What is a serial bond?
Any bond that matures in installments
What items are included in operating activities on the Statement of Cash Flows?
Cash received from Customers, Interest & Dividends, Trading Securities
Cash paid to Vendors, Suppliers, Interest, Taxes, Trading Securities
When is the fair value method used for recording interest in a separate company?
20% Ownership or Less
Accounted for as a purchase
If amount paid is less than fair value, results in a gain in current period
What is a current asset?
Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle
Includes: Demand deposits, cash equivalents, accounts receivable, inventory, prepaids, and short-term investments
What is a ‘temporary difference’ related to deferred taxes?
GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another
Example: Dividends from a subsidiary accounted for using the Equity Method; tax income, but not book income
How are derivatives recorded?
At cost when acquired, re-valued to fair value each period on Balance Sheet.
What is the primary objective of accounting?
To measure income
What expenditures are included in the cost of equipment?
All expenditures to get the asset into ‘working condition’ and ready for use:
Purchase price + liabilities assumed Shipping Taxes Insurance Installation Testing Legal fees Construction loan interest
Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.
What is the primary objective of governmental accounting?
To provide information that is useful and benefits a wide range of users including:
Costs of services provided
Sufficiency of revenues to cover costs
Financial position of entity
Which organization’s standards are the most authoritative in the hierarchy of international accounting?
The International Accounting Standards Board (IASB)
Which costs are inventoriable?
Purchases - net of discounts
Freight - FOB Shipping point costs go to buyer, FOB Destination costs charged to seller
Warehouse expenditures
How are trading securities recorded?
On the balance sheet at Fair Value, as current assets
Unrealized gains/losses are recorded on the Income Statement
If they are reclassified as held-to-maturity or available-for-sale, there is no effect upon transfer.
What are the characteristics of a capital lease for a lessee?
Risk of ownership passes to lessee by:
Title
Bargain Purchase Option (BPO)
Substance: Lease is more than 75% of asset’s useful life or PV of minimum lease payments are more than 90% of fair value
Which financial statements are required for not-for-profit organizations?
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
Statement of Functional Expense (Volunteer Health Organizations Only)
At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?
Fair Value for assets contributed.
Present value of remaining cash flows for liabilities assumed.
Which personal financial statements are required?
Statement of Financial Condition
Statement of Changes in Net Worth
Would a change from Completed Contract to Percentage of Completion be a change in accounting principle, or a change of estimate?
How would it be applied?
A change of principle.
Applied retrospectively.
What is a term bond?
Any bond that matures on a single date
What items are included in investing activities on a Statement of Cash Flows?
Cash received: Sale of PP&E, Sale of Investments, Loan Principle
Cash paid: Loans, Acquisitions, AFS or HTM Securities, Taxes, Trading Securities
When is the equity method used when purchasing another company’s stock? How is it recorded?
Ownership 21% to 50%
Gives ‘significant influence’
Purchase Price - Par Value = Goodwill
Dividends received from the investee reduce the investment account and are not income
What is a current liability?
A liability expected to be paid within 12 months or less
What is a deferred tax asset?
Deduction will reduce future income taxes expense.
How are unrealized gains/losses on trading securities recorded?
Recorded on income statement
What is the most authoritative set of accounting pronouncements?
The FASB Codification
All announcements fall under the Codification ‘umbrella’
How are Research and Development costs recorded?
They are expensed in the period incurred and are not capitalized.
What are the three major types of funds in governmental accounting?
Governmental
Proprietary
Fiduciary
Where is the first place management should look for guidance on international recognition and accounting policies?
The International Financial Reporting Standards (IFRS) issued by the IASB
When does ownership of goods transfer when shipped FOB Shipping Point?
FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock
How are Available-For-Sale securities recorded?
On the balance sheet, at fair value as either current or non-current assets.
Unrealized gains/losses are included in OCI (Other Comprehensive Income)
If reclassified as held-to-maturity, unrealized G/L go to Stockholder’s Equity
If reclassified as trading securities, unrealized G/L recognized in current period.
How is a capital lease recorded?
Capitalize at cost:
Asset & Liability Recorded at Present Value of Future Lease Payments
Discount Rate = Lesser of Implicit Rate in the Lease or Market Rate
What are the major classifications found on a Statement of Financial Position?
Similar to Balance Sheet:
Assets Liabilities Net Assets Unrestricted Assets Permanently Restricted Assets Temporarily Restricted Assets
How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?
Unlike in Regulation where the partner’s tax basis is reduced by the amount of the mortgage that the other partners absorb, calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability
Example: If you contribute a $100,000 building with a 20,000 loan, your capital account is increased by $80,000, instead of allocating the liability to the other partners according to their ownership %.
How are assets and liabilities valued in a personal financial statement?
Estimated current value
To what extent is retained earnings restricted if legally restricted due to Treasury Stock?
It will be restricted to the extent of the balance in the Treasury Stock account.
Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?
How would this change be applied?
A change in accounting principle.
Applied retrospectively.
What is a debenture bond?
A bond not secured by any collateral
What items are included in Financing Activities in a Statement of Cash Flows?
Cash received: Issuance of Stock, Issuance of Debt
Cash paid: Dividends
When are companies required to file consolidated financials? How is it recorded?
Ownership of other company is greater than 50%
Investment account is eliminated
Only parent company prepares consolidated statements, not subsidiary.
Acquired assets/liabilities are recorded at Fair Value on acquisition date.
Eliminating entries for intercompany sales of inventory & PPE, also intercompany investments
How is the Quick Ratio calculated?
(Cash + A/R + Trading Securities) / Current Liabilities
What is a deferred tax liability?
Income will be taxable in a future period and will increase future tax expense
How are gains and losses on Available for Sale (AFS) securities recorded?
They are included in Other Comprehensive Income.
What is the highest authority within the FASB codification?
FASB SFAS, APB Opinions, ARBs
Which expenditures are included in the cost of a building?
All expenditures to get the building into ‘working condition’ are ready for use
Which two accounting bases are used in governmental accounting?
Accrual basis - current economic resources focus (revenues recognized when earned)
Modified accrual basis - current financial resources focus (revenues recognized when available and measurable)
Which framework helps to develop standards for international accounting?
The IASB Framework
- The framework is NOT a standard itself
- The framework does not supersede any standard’s authority
When does ownership transfer when goods are sent FOB Destination?
FOB Destination keeps the items in the seller’s inventory until it reaches the buyer
How are held-to-maturity securities recorded?
On the balance sheet at amortized cost as current or non-current assets.
Unrealized gains or losses are not applicable.
If reclassified as available-for-sale, unrealized G/L go to Stockholder’s Equity
If reclassified as trading securities, unrealized G/L recognized in current period
What footnote disclosures are required for a capital lease?
Future minimum rental commitments
By year – for 5 years
All remaining years as a group
What are the major classifications in a Statement of Activities?
Similar to an Income Statement, organization-wide:
Revenues Expenses - ONLY deducted from Unrestricted Revenues Gains and Losses Changes in Net Asset classes Unrestricted Permanently Restricted Temporarily Restricted
If no goodwill is recorded upon admission of a new partner, which method is used for recording the new partner’s interest?
The bonus method:
Old Partnership Equity \+ New Partner Contribution = New Partnership Equity x New Partner % = New Partner Equity Amount
New Partner Contribution
- New Partner Equity Amount
= Bonus to Prior Partners using same allocation as P/L
How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a personal financial statement?
Presented on Statement of Financial Condition between Liabilities and Net Worth
When are dividends in arrear recorded for cumulative preferred stock?
They are not accrued until declared.
How is a change in accounting estimate applied?
A change in accounting estimate is applied prospectively (going forward).
No backwards adjustment is made.
What is a sinking fund bond?
Cash is held in a sinking fund for repayment of bond at maturity
5 years of requirements and maturity details should be disclosed
What is the direct method for a Statement of Cash Flows?
Starts with Income from Continuing Operations
Adjusts for changes in accounts like A/R, A/P, Inventory and non-cash revenues, expenses, gains, losses
If used, the Indirect Method must also be shown
When is consolidation not required?
Ownership less than 50%
OR
Majority owner does not ‘control’ - i.e. bankruptcy or foreign bureaucracy
How is the Current Ratio calculated?
Currents Assets / Current Liabilities
Which period’s tax rate is used to calculate a deferred tax asset or liability?
The FUTURE enacted tax rate, not the current one.
It is never discounted to present value.
What is a Fair Value Hedge? How is it recorded?
Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment
Initially recorded on Balance Sheet at Fair Value
Gains/Losses recorded on Income Statement
What is the 2nd highest authority tier in the FASB codification?
FASB Technical Bulletins, SOPs, Industry Guides
Which expenditures are included in the cost of land?
All expenditures to get the land ready for its intended use:
Title & County Fees
Clearing of Land - Dirt work, etc.
Demolition and removal of old buildings (minus any scrap or salvage)
Note: capitalized land costs are not depreciated
What is a budget appropriation?
The highest amount allowed for a particular expenditure under a budget.
What is the objective of the IFRS framework?
To provide users with information on international accounting.
Which costs are non-inventoriable?
Sales Commissions
Interst on liabilities to vendors
Shipping expense to customers
What are the requirements for a capital lease for a lessor?
Same as for lessee (Title, BPO or Substance), PLUS:
Collectibility of lease payments is predictable
No uncertainties about the lessor reimbursing the lessee for costs incurred
What are the characteristics of a Statement of Cash Flows for not-for-profits? What are the major classifications?
Both direct and indirect methods are OK
Operating Activities - Unrestricted Revenues and Unrestricted Expenses
Investing Activities
Financing Activities - Endowments and restricted contibutions
If goodwill is recorded upon admission of a new partner, how is the partner’s interest recorded?
Using the goodwill method:
New Contribution / New Equity % = Partnership Value
Implied Value of Partnership
- Capital Accounts of all partners
= Goodwill to Old Partners
Under the Goodwill Method, the new Partner is paying an amount for a certain percentage stake in the partnership. For instance if they pay $1000 for a 25% stake, then it is assumed that the Partnership is worth $4,000 ($1,000/25%)
What is the general presentation on a statement of financial condition?
Assets
- Liabilities
- Estimated taxes on assets sold
= Net Worth
When are dividends in arrears included as a disclosure and not an accrual in the financial statements?
If a year passes and no Cumulative Preferred Stock is declared, then the dividends in arrears are included as a disclosure – not an accrual in the Financial Statements.
Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?
How would this change be applied?
Change in depreciation method would be a change in accounting estimate.
It is applied prospectively.
What is the formula to calculate proceeds of a bond sale?
Present Value of the principal payment at maturity
+ Present Value of Interest Payments made
= Market Value of Bond Proceeds
What is the Indirect Method for a Statement of Cash Flows?
Starts with Net Income
Adjusts for changes in accounts like A/R, A/P, Inventory and non-cash revenues, expenses, gains, losses
What occurs under a step acquisition?
Acquirer held previous shares accounted for under Fair Value Method or Equity Method and are now re-valued to Fair Value
Results in a Gain or Loss in current period
How is Working Capital calculated?
Currents Assets - Current Liabilities
What valuation allowance is used with respect to a deferred tax asset?
If it is “probable” that not all of a Deferred Tax Asset (debit) will be realized, then the Deferred Tax Asset account must be written down (credit) to reflect this
What is a Cash Flow Hedge? How is it recorded?
Cash flow hedges protect from exposure to fluctuations in cash flows.
Initially recorded on Balance Sheet at Fair Value
Gains/Losses going to OCI
Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.
What is the lowest authority in the FASB codification?
Industry practices
In an exchange of non-monetary assets, how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?
If the cash flows from the assets exchanged are not significantly different, no gain or loss is recognized on a non-monetary exchange, as it lacks commercial substance.
The new asset is recorded at the book value of the asset given up.
The only gain that can be recognized is any boot (cash) received.
What is an encumbrance?
Records purchase and reserves it for the encumbrance.
Which assumptions are followed within the IRFS framework?
The entity is a going concern (IFRS cannot be used if NOT a going concern)
Entity uses the ACCRUAL basis of accounting.
When are discounts recorded under the gross method?
Under the gross method, discounts are recorded only when used.
What are the characteristics of an operating lease for a lessee?
Risk of ownership does NOT pass
No asset or liability is recorded on the financial statements
Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement’s life.
Which organizations are required to present a Statement of Functional Expenses?
Volunteer Health Organizations
How is life insurance presented on a personal financial statement?
Only shown if there is cash surrender value
It is shown net of loans against the policy
What is the gain or loss when a non-monetary asset is distributed to a shareholder?
The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company’s books
How is a correction of an accounting error made?
Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.
The correction of the error must be included in the footnotes.
How is the present value of a bond calculated?
Step 1: PV of $1 @ Yield Rate (not Stated Rate)
x Bond Face Value
PLUS
Step 2: PV of an Ordinary Annuity of $1 for Term @Yield
x (Stated Rate x Face)
What is the difference between an acquisition and a merger?
Acquired companies continue to exist as a legal entity – their books are just consolidated with the parent company in the parent’s financial statements
Merged companies cease to exist and only the parent remains
How is A/R Turnover calculated?
Credit Sales / Average A/R
What effect do ‘permanent differences’ have on deferred income taxes?
They have no tax impact.
When calculating the total differences between book and tax income- subtract the permanent differences from the total before applying a future enacted tax rate
Where are gains and losses on foreign currency hedges recorded?
In Other Comprehensive Income (OCI)
Whose pronouncements are above industry practice in authority but below FASB Technical bulletins and industry guides within the FASB Codification?
Emerging Issues Task Force (EITF)
In an exchange of non-monetary assets, what gain is recognized if resulting cash flows are significantly different?
If resulting cash flows are significantly different, then the transaction has commercial substance and a gain/loss is recorded on the exchange.
The new asset is recorded at the FAIR VALUE of the assets given up, unless the asset acquired has a fair value that is easier to determine.
What is the opening budgetary entry?
Dr Estimated Revenues Control
Cr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
What are the qualitative characteristics of accounting information wtihin IFRS?
Understandability - Easy to use and understand
Relevance - helps user make decisions, predictive value, confirmatory role, materiality
Reliability - Faithful representation, substance over form, neutrality, prudence, completeness
Comparability - Comparative information from prior year is required
Under the net method, when are discounts recorded?
Under the net method, discounts are recorded whether used or not.
Unused discounts are allocated to financing expense.
What are the characteristics of an operating lease for a LESSOR?
Rent revenue recorded
Leased property remains an asset and depreciated by lessor
If payments fluctuate over the term of the lease, rent revenue recognized on a straight line basis
Which statements are required for non-governmental hospitals?
Balance Sheet Statement of Operations Statement of Changes in Net Assets Statement of Cash Flows Financial Statement Notes
How are business interests shown on a personal financial statement?
Business Interests that constitute a large percentage of total assets should be separated from other investments
What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?
The effect on Retained Earnings is the Carrying Amount of the asset
RE will be debited when the dividend is declared for the FMV of the asset, which is more (or less) than the carrying amount
Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash
The net effect of the entry is that RE will decrease by the CV of the asset
What are the requirements for a prior period adjustment?
Effect is Material
Is identifiable in Prior Period
Couldn’t be estimated in Prior Periods
Which costs are included in bond issuance costs? How are they recorded?
Include Engraving, Printing, Legal, Underwriter, Registration
Debited to a deferred charge account and amortized over life of Bond using S/L
Bond Proceeds –Bond Issuance Costs = Net Bond Proceeds
Time of amortization begins when issued
How are acquisition costs recorded in a merger?
Expensed in period incurred – i.e. NOT capitalized:
Accounting, Legal, Valuation, Consulting, Professional
Netted against stock proceeds:
Stock registration and issuance costs
How is Inventory Turnover calculated?
COGS / Average Inventory
What is deferred income tax expense?
The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities
GAAP Method for calculating is the ‘Asset and Liability Approach’
Note: IFRS uses the ‘Liability approach’ only
What disclosures are required for derivative transactions?
Objectives and Strategies
Context to help investor understand the instrument
Risk Management Policies
Complete List of Hedged Instruments
How does managerial accounting differ from financial accounting?
Managerial Accounting has a “timeliness” focus
Managerial Accounting does not follow GAAP
How is donated property recorded by the donee?
Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose
Exam Tip - Think of a charity holding a “fair” and then donating the property which is then recorded at “fair value”
What is the closing budgetary entry?
Dr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Cr Estimated Revenues Control
Which aspects of RELEVANCE in IFRS differ from GAAP?
Under IFRS, a confirmatory role is played by information (as opposed to feedback value in GAAP)
Materiality falls under relevance for IFRS, versus being iprimary constrainti in GAAP
How is gross margin calculated?
Gross Margin = Sales – COGS (BI + P – EI)
What are the characteristics of a direct financing lease?
Interest Revenue (or expense for lessor) decreases with passage of time
Principal amount increases with each payment
Carrying amount of Lease decreases
Which basis of accounting is used for revenues and net assets?
Accrual basis of accounting is used
Only external parties can restrict the use of assets (permanent or temporary)
Assets earmarked internally by management are still classified as unrestricted
What is the discreet view in an interim financial statement?
Interim period is a separate accounting period - not GAAP
Same accounting principles used for annual reporting should be used.
When is Retained Earnings debited for FMV of Stock for a stock dividend?
When Stock Dividend is less than 25% of Common Stock outstanding
How is a change from a non-GAAP accounting method to a GAAP method recorded?
It is treated as a correction of an accounting error.
Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements
Correction of the error must be included in the footnotes
How are bonds reported when classified as trading securities?
Reported at FMV with unreleased gains and losses being included in earnings
How is Day Sales in Inventory calculated?
365 / Inventory Turnover
How do transactions denominated in in a currency other than a company’s functional currency affect the income statement?
Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
How is donation of property recorded by the donor?
Recorded at Fair Value of asset given up.
Gain or Loss is recorded.
What are the types of governmental funds?
General Fund Special Revenue Fund Permanent Fund Capital Projects Fund Debt Service Fund
How does RELIABILITY differ under IFRS from GAAP?
Both have neutrality and faithful representation or representational faithfulness.
GAAP also has verifiability;
as opposed to ‘substance over form’
completeness
and prudence within IFRS.
Note: PRUDENCE or exercising caution replaces ‘conservatism’ in GAAP.
Describe the periodic inventory system.
Inventory is counted at certain times throughout the period
Weighted-average cost flow method is used.
How is a sale-leaseback recorded?
Any profit on the sale is deferred and amortized
Exception: If PV of lease payments is 10% or less of the asset’s FMV, the gain is recognized
If PV of lease payments is greater than 10% of FMV and the lease is operating, all of the gain is recognized except the amount of the PV of the lease payments
